Shlomo Benartzi

Save More Tomorrow – Nudges to boost savings

Throughout his career, Benartzi has been dedicated to applying his research in the real world. One of his principal aims is to help people improve their decision-making within the realm of financial savings, so as to ensure better retirement outcomes. This goal took the form of a behavioral intervention known as the Save More Tomorrow program, which Benartzi developed alongside his frequent collaborator, Richard Thaler.¹ This intervention is based on nudge theory, which was made famous by Thaler and his co-author Cass Sunstein, in their book Nudge: Improving decisions about health, wealth, and happiness. Thaler and Sunstein define nudges as “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” (p. 6).² 

“Loss aversion kicks in when it comes to savings… Mentally and emotionally and intuitively, [I] frame savings as a loss because I have to cut my spending.”

― Shlomo Benartzi

The Save More Tomorrow intervention, which uses behavioral science to encourage people to increase their retirement savings, consists of three components. People are first asked to make a commitment to increasing their savings.³ We have a tendency to value smaller, immediate rewards more than we do greater, future rewards.⁴This can cause us to spend our money today on smaller rewards, like vacations or shopping sprees, instead of saving it for our bigger future goals, like retirement. This is referred to as present bias, or hyperbolic discounting. Berartzi’s idea is that making a commitment to save more will hold people accountable and help them avoid engaging in that bias. The second core feature of this program is the association between pay raises and planned increases in savings. In this program, people only begin increasing their savings after they get their next pay raise. This helps people avoid another major roadblock to saving for retirement: loss aversion. When deciding to save more, people generally have to reduce their spending, which they view as a loss.⁵ We tend to want to avoid losses, so we view this as undesirable. However, this effect can be offset by an increase in pay, as their take-home (or spending) money will not decrease.⁶ Similarly, it reduces the need for self-control, as people can still increase their contributions to their pension, without significantly reducing their spending.⁷ Finally, one can opt out of the program at any time. As defined by Thaler and Sunstein, the ability to opt out is necessary for an intervention to qualify as a nudge.⁸ According to the status quo bias, we are more likely to stick with something than we are to go out of our way to opt out of it, so people are more likely to stick to the program.

“There is a larger lesson here: we need to treat attention as a literal resource.” 

― Shlomo Benartzi in The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior

The Save More Tomorrow program was launched by Benartzi and Thaler in 2004.⁹ Since then, it has helped fifteen million Americans significantly increase their savings,¹⁰ fulfilling Benartzi’s goal of applying behavioral science principles to real world problems to improve people’s decision-making and help them invest in their future. Benartzi addresses his research, this program, and its implications for society at large in the TED Talk he gave in 2012, “Saving for tomorrow, tomorrow”.

Naive diversification – Why we equally divide our resources among the options available to us

Being aware of the cognitive biases that can influence our decision-making can help us avoid them and make more adaptive decisions. Benartzi collaborated with Richard Thaler to bring one of these biases to light. Naive diversification, also known as naive allocation, or diversification bias, refers to our tendency to divide our resources among the options presented to us. In the most extreme cases, we may allocate our resources equally among the options, even if the options themselves are not equivalent. This specific case is referred to as the 1/n heuristic, where “n” represents the number of available options. Together, Thaler and Benartzi wrote one of the first and most influential papers on the topic, “Naive Diversification Strategies in Defined Contribution Savings Plans”, which was published in 2001. By applying this cognitive bias to savings plans, they were able to demonstrate that asset allocation is positively correlated with the number of options of savings plans that the participants were shown. Furthermore, they showed that people only engage in naive diversification if they are deciding between the options at the same time, or simultaneously. This bias is not observed when decisions are made sequentially, or at different times.¹¹

“Self control is not a problem of the future. It is only a problem now, when the chocolate is next to us.”

― Shlomo Benartzi in his TED Talk, Saving for tomorrow, tomorrow

Benartzi and Thaler are both staunch believers in the integration of psychology and economics. They argue that the model of humans as consistently rational agents is flawed, as we tend to make irrational decisions, often in predictable ways. Biases are an example of a factor that can lead us to be irrational agents. One such bias is naive diversification, which describes how we tend to divide our resources, such as time and money, among all options presented to us. Benartzi and Thaler demonstrated this through their study of children’s candy selection on Halloween. In this study, trick-or-treaters were split into two groups. Children in the first group went to two different houses. At both houses, they were shown a pile of Three Musketeers candy bars and a pile of Milky Way candy bars, and told to choose one. 48% of the participants in this condition, which Benartzi and Thaler refer to as the “sequential choice condition”, chose two different chocolate bars. The remaining 62% chose the same candy bar at each house. Children in the second condition, called the “simultaneous choice condition”, only went to one house. At this house, they, like the children in the sequential choice condition, were presented with a pile of Three Musketeers bars and a pile of Milky Way bars. However, unlike the children in the other condition, those in the simultaneous condition were told to choose two bars. All of the children took one Three Musketeers bar and one Milky Way bar, exhibiting a perfect example of naive diversification.¹²

“The lesson is simple: human attention has become the sweet crude oil of the twenty-first century. If you can control the levers of human attention, then you can essentially charge whatever you’d like.” 

― Shlomo Benartzi in The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior

The development of this theory is one way in which Benartzi and Thaler have helped bring psychology into economics. This integration of these fields is crucial, as economic models cannot accurately capture human behavior or decision-making while the assumption continues to be that humans are always rational. The concept of naive diversification can be particularly informative for choice architects, who decide how decisions are presented to decision-makers. Choice architects should understand that presenting options as distinct categories, such as Three Musketeers bars versus Milky Way bars, can result in people investing some of their resources into each category when they are asked to make the choices simultaneously. On the other hand, if the choice architect presents the options as all being in one category, such as the broad category of “candy bars”, this effect may not be observed. Furthermore, they should consider the effect of simultaneous versus sequential choices.

While cognitive biases are not always maladaptive – in fact, Benartzi and Thaler stress that naive diversification can lead to favorable outcomes – it is still important to be aware of them and how they can affect the choices we make. Biases can be useful for reducing cognitive load, or the amount of mental energy we devote to a given problem or task, but when it comes to important decisions, such as ones about investments, it is better to make an effortful decision based on reason.

“While the diversification heuristic can produce a reasonable portfolio, it does not assure sensible or coherent decision-making.”

― Richard H. Thaler and Shlomo Benartzi in “Naive Diversification Strategies in Defined Contribution Savings Plans”

Behavioral economist Shlomo Benartzi received his Ph.D. from the Johnson Graduate School of Management at Cornell University. He is a co-founder of the Behavioral Decision-Making Group at UCLA’s Anderson School of Management and is a Distinguished Senior Fellow at the Wharton Behavior Change for Good Initiative.¹³ 

Benartzi is best known for his concept of “Save More Tomorrow”, which grew out of his behavioral science research and has led to a book, a TED Talk, and a popular intervention. He aims to help people boost their savings so that they have enough money put away for retirement. In 2012, he published his book Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans, in which he discusses the cognitive obstacles that stand in our way of saving more and how to overcome them. That same year, he gave a TED Talk titled “Saving for tomorrow, tomorrow”, which addresses similar topics. Another book, titled Thinking Smarter: Seven Steps to Your Fulfilling Retirement…and Life, in which he outlined seven steps to changing the way we think, to allow us to reflect more deeply and make more adaptive choices, all in the name of helping us attain our goals. Of course, Benartzi’s work in this area also led him to develop the Save More Tomorrow program, which he created alongside Richard Thaler. This program takes the concepts presented in his book Save More Tomorrow, and helps people apply them in their own lives. Approximately fifteen million people have improved their savings with the help of this intervention.

“One last question: How many of you feel comfortable that as you’re planning for retirement you have a really solid plan when you’re going to retire, when you’re going to claim Social Security benefits, what lifestyle to expect, how much to spend every month so you’re not going to run out of money? How many of you feel you have a solid plan for the future when it comes to post-retirement decisions. One, two, three, four. Less than three percent of a very sophisticated audience. Behavioral finance has a long way. There’s a lot of opportunities to make it powerful again and again and again.”

― Shlomo Benartzi in his TED Talk, Saving for tomorrow, tomorrow

Benartzi has applied his research through his work as an advisor for financial institutions and Voya Financial, which is a group of American retirement, investment and insurance companies.¹⁴ Benartzi’s expertise informs Voya Financial’s approach to improving people’s retirement outcomes.¹⁵

Much of Benartzi’s research has been conducted in collaboration with Richard Thaler. Thaler, who is currently a professor of behavioral science and economics at the Booth School of Business at the University of Chicago,¹⁶ is known for his efforts to integrate psychology into the field of economics. In fact, his research in this area won him the Nobel Memorial Prize in Economics in 2017.¹⁷ Together, Thaler and Benartzi developed the theory behind the cognitive bias of naive diversification, as well as the concept of nudges, which lead to the creation of the Save More Tomorrow program.¹⁸

Saving for tomorrow, tomorrow

In his TED Talk from 2012, Benartzi addresses what he calls the biggest obstacle in saving for retirement: the notion that it is easy to picture saving money later on, but not today. As a general rule, we want to spend money now, and we justify it by saying that we will start saving in the near future. Of course, this vicious cycle continues, preventing people from accruing the savings they need. By applying his theories from behavioral economics, Benartzi offers recommendations for how to overcome this common challenge.

The Smarter Screen: Surprising Ways to Influence and Improve Online Behavior

Benartzi wrote The Smarter Screen in collaboration with Jonah Lehrer. This book, which was published in 2015, presents the biases and behavioral patterns that are associated with screens, from our phones and smartwatches to laptops and tablets. Since we spend so much of our time in front of screens, it is important to be aware of the biases specific to them that can influence our decision-making. In addition to sharing some of the biases of the digital age, Benartzi and Lehrer offer recommendations for how digital nudging can be used to help us improve our decision-making, instead of impairing it.

Save More Tomorrow: Practical Behavioral Finance Solutions to Improve 401(k) Plans

This 2012 release focuses on the crux of Benartzi’s research: behavioral interventions that can be used to improve people’s financial savings. Benartzi highlights the cognitive processes, including loss aversion and lack of self-control, that lead to poor retirement outcomes, and transforms them into behavioral solutions that can help improve people’s investment decisions.

Thinking Smarter: Seven Steps to Your Fulfilling Retirement…and Life

In Thinking Smarter, which was released in 2015, Benartzi introduces a seven step system, which he refers to as the Goal Planning System, or GPS. He developed this system in order to encourage people to think more deeply, as there is evidence suggesting that we tend to avoid thinking profoundly when it comes to challenging issues. Benartzi suggests that by applying this system to retirement planning, people can come to a better understanding of their goals and the steps they need to take to attain them.

1. Save More Tomorrow. ShlomoBenartzi.com. http://www.shlomobenartzi.com/save-more-tomorrow
2. Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven, CT: Yale University Press.
3. See 1
4. Present Bias. Behavioral Economics. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/present-bias/
5. Financial Nudge: The Classic Example of “Save More Tomorrow”. iNudgeyou. https://inudgeyou.com/en/financial-nudge-the-classic-example-of-save-more-tomorrow/
6. See 1
7. See 5
8. See 5
9. See 5
10. See 1
11. Benartzi, S. and Thaler, R. H. (2001). Naive Diversification Strategies in Defined Contribution Savings Plans. American Economic Review. 91(1), 79-98. DOI: 10.1257/aer.91.1.79
12. See 11
13. About Shlomo. ShlomoBenartzi.com. http://www.shlomobenartzi.com/about
14. See 13
15. Meet Dr. Shlomo Benartzi. Voya Financial. https://forprofessionals.voya.com/articles/meet-dr-shlomo-benartzi
16. See 13
17. The Prize in Economic Sciences 2017. The Nobel Prize. https://www.nobelprize.org/prizes/economic-sciences/2017/press-release/
18. See 1