ECU NEH-HES 1N PRACTICE Behavioral Biases in Saving Behavior This chapter has described how saving is related to income. Economists have generally assumed that people make their saving decisions rationally. just as they make other decisions about choices in consumption and the labor market Saving decisions involve thinking about trade-offs between present and future consumption. Recent work in behavioral economics has highlighted the role of psychological biases in saving behavior and has demonstrated that seemingly small changes in the way saving programs are designed can result in big behavioral changes. Many retirement plans are designed with an opt-in fea- ture. That is. you need to take some action to enroll.Typically. when you begin a job. you need to check yes on the retire- ment plan enrollment form. Recent work in economics by James l[lhoi of Yale University and Bridget Madrian and Dennis Shea of the University ofChicago suggests that simply changing the enrollment process from the optin structure just described to an optout system in which people are auto- matically enrolled unless they check the no box. dramatically increases enrollment in retirement pension plans. In one study. die change from an opt-in to an optout system increased pension plan enrollment after 3 months of work from I55 percent to 9'3 percent of workers. Behavioral economists have administered a number of sur- veys suggesting that people. on average. think they save too lit- tle of their income for retirement. Shlomo Benartzi. from the University of California. Los Angeles. and Richard Thaler. from the University of Chicago. devised a retirement program to try to increase saving rates. Under this plan. called Save More Tomorrow. employees are offered a program that allows 1em to precommit to save more whenever they get a pay raise. Behavioral economists argue that people find this option attractive because it is easier for them to commit to making sacrices tomorrow than it is for them to make those sacrices today. [This is why many people resolve to diet some time in the future but continue to overeat today.) The Save More Tomorrow retirement plans have been put in place in a num ber of companies. including Vanguard. T. Rowe Price. and TEACHEF. Early results suggest dramatic increases in the saving rates of those enrolled. with saving rates quadrupling after 4 years and four pay raises