Thursday, 30 December 2010

NEST and limiting choice

One of the minor grumbles I have about my own side is the tendency of some Labour politicians to be sceptical about behavioural economics, albeit seemingly unwittingly. This is usually expressed in terms of swipes at Cameron about 'nudging', and I expect that in many cases these comments are made with out much understanding of what Nudge was all about.

I find it frustrating for two reasons. First because I think it is strategically stupid to allow the Right in the UK to plant their flag on this stuff in policy terms (though I am yet to be convinced that they are using it as more than fluff in placed articles). Second because actually Labour got there first and has introduced a major policy that is significantly influenced by behavourial economics. In the case of the latter point I mean, of course, NEST.

In fact NEST employs two ideas that are rooted in decision-making research. The first, probably better-known, is the auto-enrolment feature. This requires people to opt out if they don't want to save, rather than than opt in if they do. This has been proven to increase scheme membership dramatically, and is based on the idea that people put off difficult/boring decisions and that not starting saving often isn't an active choice (as non-joiners typically say they know they should be saving). Similarly NEST savers will end up in the default fund if they don't actively choose how to allocate their savings.

The second, and to my mind more interesting, feature of note in NEST is the limitation on fund choices. This is based on research suggesting that increasing the options beyond a certain number often results in less choices being made. I'm currently reading Sheena Iyengar's book The Art of Choosing (which is quite good) which covers this stuff in some detail. Iyengar is quite famous for a study involving jam - simple version: customers bought more of it when the options were fewer. This research, and similar studies, led to some financial service providers reviewing what effects increasing the number of fund choices had on decisions to save. Again there was a clear finding - beyond a certain point the more funds you add the few people you get saving. Too much choice.

Therefore NEST is putting into practice some important theories about how we now think choice actually works (including that there can be too much of it some cases). That ought to be of significant interest to Labour and the wider movement and if it works a) we ought to be pretty proud of it and b) we ought to think about where else this kind of thing could be applied. For instance, if we think too much choice is a bad thing in saving for retirement, what about mortgages?

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