TY - JOUR AU - Choi, James AU - Laibson, David AU - Madrian, Brigitte AU - Metrick, Andrew TI - Passive Decisions and Potent Defaults JF - National Bureau of Economic Research Working Paper Series VL - No. 9917 PY - 2003 Y2 - August 2003 DO - 10.3386/w9917 UR - http://www.nber.org/papers/w9917 L1 - http://www.nber.org/papers/w9917.pdf N1 - Author contact info: James J. Choi Yale School of Management 165 Whitney Avenue P.O. Box 208200 New Haven, CT 06520-8200 E-Mail: james.choi@yale.edu David Laibson Department of Economics Littauer M-12 Harvard University Cambridge, MA 02138 Tel: 617/496-3402 Fax: 617/495-8570 E-Mail: dlaibson@gmail.com Brigitte C. Madrian 730 B N. Eldon Tanner Building Brigham Young University Provo, UT 84602-3113 Tel: 801-422-4248 E-Mail: brigitte_madrian@byu.edu Andrew Metrick Yale School of Management 135 Prospect Street P.O. Box 208200 New Haven, CT 06520 Tel: 203/432-3069 E-Mail: metrick@yale.edu M1 - published as James J. Choi, David Laibson, Brigitte C. Madrian, Andrew Metrick. "Passive Decisions and Potent Defaults," in David A. Wise, editor, "Analyses in the Economics of Aging" University of Chicago Press (2005) AB - Default options have an enormous impact on household choices.' Defaults matter because opting out of a default is costly and these costs change over time, generating an option value of waiting. In addition, people have a tendency to procrastinate. We develop a theory of optimal defaults based on these considerations. We find that it is sometimes optimal to set extreme defaults, which are far away from the mean optimal savings rate. A default that is far away from a consumer's optimal savings rate may make that consumer better off since such a bad' default will lead procrastinating consumers to more quickly opt out of the default. We calibrate our model and use it to calculate optimal defaults for employees at four different companies. Our work suggests that optimal defaults are likely to be at one of three savings rates: the minimum savings rate (i.e., 0%), the match threshold (typically 5% or 6%), or the maximal savings rate. ER -