Showing people how their retirement finances stack up
against those of peers doesn’t motivate them to save more and, in some cases,
can actually backfire—that is, discourage people from participating
in a 401(k) altogether—according to a paper I recently published in the Journal
of Finance in collaboration with researchers from Harvard University and the
University of Pennsylvania’s Wharton School.
Such results are surprising, considering peer-comparison
strategies are being used successfully in other domains to get people to change
their behavior. The findings also raise questions about whether financial
companies are on the right track in creating tools that allow customers to see
how much others are saving. Part of a movement known as social-norms marketing,
the tools are based on the idea that much of human behavior is influenced by
what people consider to be “normal,” so if you can correct misperceptions about
what normal behavior is, you can motivate the underperformers to move closer to
The strategy seems to work in certain situations. Some
utilities, for example, have managed to persuade customers to conserve
electricity by showing them how their energy use compares with that of
neighbors. Why then, might social-norms strategies fall flat when it comes to
retirement savings? It could be that learning that your peers are ahead of you
financially is much more demoralizing than, say, learning that you use more
energy than your neighbors. And when people are demoralized, they tend to
disengage from a problem rather than address it.
To study the issue, my co-authors ( John Beshears, David
Laibson,and Brigitte Madrian of Harvard, and Katy Milkman of
Wharton) and I teamed up with a company that wanted to encourage its employees
to save more for retirement. The company sent about 1,400 workers who weren’t
participating in its 401(k) plan a simplified enrollment form that let them
start contributing 6% of their pay to the 401(k) just by checking a box, signing,
and mailing the form back.
The key twist was that different workers received different
versions of the form. Some were randomly chosen to get a form that revealed the
fraction of co-workers in their age group who already were contributing to the
401(k). Others got a form without this information. We then compared the
behavior of those who received peer information to those who didn’t.
We went into the study thinking that peer information would
increase savings, but we found no robust evidence that it did. And for the
subset of nonsavers that we thought would be most susceptible to peer
influence—those who weren’t subject to 401(k) automatic enrollment—peer
information actually discouraged them from joining the plan. Most of the people
in this group weren’t opposed to saving; rather, they simply hadn’t gotten
around to joining the plan. Yet peer information reduced subsequent enrollment
rates in this group by a third—from 9.9% to 6.3%.
A vulnerable group
So why didn’t peer pressure work? We considered whether the
problem was that the peer information moved beliefs in the wrong direction.
That is, maybe employees learned that fewer of their co-workers were saving
than they thought, so not saving felt more in line with the norm. But if
employees were surprised at how few of their co-workers were saving, peer
information should have had a more positive effect among those who saw that a
higher fraction of their co-workers were saving. It didn’t. In fact, the higher
the peer group’s savings, the more peer information reduced enrollment.
In the end, we concluded that peer information most likely
reduced savings because it left the laggards feeling too discouraged. Imagine
finding out that not only are you way behind on your financial goals, but
nearly everybody around you is way ahead of you. It’s easy to see how you might
want to avoid thinking about the problem altogether.
In our study, the negative effects of peer information were
concentrated among those with low salaries, which is consistent with previous
studies showing that negative information typically has a stronger effect on
low-status individuals. Researchers have theorized this is because low-status
individuals have higher background levels of stress, which makes them more
vulnerable to depression in response to setbacks, defeats and humiliations.
In sum, while it may be helpful to learn what your peers are
doing in areas not so intimately tied up with self-worth and identity, when it
comes to saving for retirement, it might be best to avoid comparisons with
here to access the full article on The Wall Street Journal.