A Nudge Isn’t Always Enough

Over the past decade, researchers have focused attention on a new approach for encouraging Americans to adopt beneficial behaviors. This approach relies on making the desired behavior occur automatically unless an individual chooses to opt out. A prominent example is automatic enrollment in 401(k plans, in which employees are signed up for the plan at a default contribution rate if they do not take any action. This policy has proven to be a potent way to boost participation rates. While such default design strategies can improve some saving decisions, researchers have begun exploring their potential limitations. For example, one recent study found that setting a very high default contribution rate for a workplace saving plan caused many workers to choose a different rate. This brief is based on a new study that also tests the limits to default design through an experiment to encourage low-income individuals to save about 10 percent of their tax refund. The discussion is organized as follows. The first section describes the behavioral theory behind default design. The second section explains how defaults were used to nudge some low-income tax-filers to buy U.S. Savings Bonds with a portion of their tax refund. The third section discusses the results: the tax filers who were “nudged” to invest in the bonds were no more likely than other low-income filers to participate, apparently because they already had plans to spend their refunds. The final section concludes that policies that rely on default design may not work when they clash sharply with individuals’ intentions.