Inertia

Inertia is caused when loss aversion makes people reluctant to make decisions for change because they focus on what they could lose more than on what they might gain.

Inertia is at play when people know they should be doing certain things that are in their best interests (like saving for retirement), but find it hard to do today. Procrastination and lack of self-control rule the day.

However, people are usually willing to say they will do the right thing at some point in the future: “I’ll start saving for retirement tomorrow, I promise!”

While many employees express an interest in saving for retirement, they simply never get around to joining the plan.

Auto Enrollment takes advantage of Inertia by re-framing the savings decision negatively: “Quit the plan if you like.” In such a design, Inertia or “doing nothing” leads to participation in the plan.

 


Source: Benartzi, S. (2012). Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans. Portfolio/Penguin Group Publishers.


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