Nudges and signposts: The effect of smart defaults and pictographic risk information on retirement saving investment choices

The authors tested two interventions to improve retirement savings investment decisions. In an incentive-compatible experiment, 459 participants engaged in a task simulating their working life. Periodically during the simulation, participants chose between different investment options. The authors examined the effectiveness of a "nudge" by manipulating the default option and the effectiveness of a "signpost" by manipulating the display of a pictograph summarizing the expected return of each option. Participants often followed the default option, particularly when it was "smart" (i.e., became more conservative as retirement approached) and when presented together with dynamic pictographs (i.e., updated each year assuming the investment was held until retirement). Those most likely to make optimal choices (i.e., consistent with the life cycle model) were presented with a smart default or dynamic pictographs. These findings reveal how different choice architecture interventions can be used to positively influence behavior. Retirement funds and regulators can support retirement savings decisions by the provision of smart defaults and better risk information in the form of pictographs.