Many employers now use an 'automatic enrolment' system for occupational pensions, where employees are automatically registered to save a portion of their salary for retirement unless they actively choose to opt out.
According to behavioural economic theory, why is this choice architecture policy highly effective at increasing savings rates, whereas traditional neo-classical theory suggests it should have little to no impact on rational agents?
Behavioural economics assumes that individuals are consistently successful in processing complex probability distributions, whereas traditional theory assumes individuals rely on simple heuristics and rules of thumb.
Behavioural economics assumes that individuals act solely out of altruism towards future generations, whereas traditional theory assumes individuals act with bounded rationality to maximise short-term consumption.
Behavioural economics recognises that individuals are subject to status quo bias and bounded self-control, whereas traditional theory assumes agents instantly calculate and execute their optimal long-term savings plan regardless of the default option.
Behavioural economics assumes individuals suffer from cognitive overload due to perfect information, whereas traditional theory assumes agents suffer from asymmetric information which is resolved by default options.
