Newtown’s First Law of Behavioral Economics

People are much more likely to contribute to their employer’s 401(k) if they are automatically enrolled.

Automatic enrollment means the firm enrolls the employee by default. This is in contrast to the traditional method of manual enrollment where the employee asks to be enrolled.

Similarly, when people purchase subscription services or sign up to donate to charity through automatic recurring payment, they usually end up donating more than people who conduct one-off transactions.

This is related to two important concepts. First is the idea that people only trade up. Much of economics holds that people choose the point of indifference, but an alternative view holds that they consume up until the point of indifference and no further. A balanced, probabilistic view, holds that people have a 50% chance to consume at the point of indifference.

The second is the notion of ignorance or imperfect information. People are sometimes rationally indifferent, but they are also often indifferent due to a lack of information.

Put it all together and you get what I call Newtown’s First Law of Behavioral Economics. When a person is indifferent, they will continue to do whatever they have been doing. Alternatively, people will not change their behavior without a positive incentive.*

*Perhaps even a positive, significant, and/or important incentive?

  • 1

2 thoughts on “Newtown’s First Law of Behavioral Economics”

Leave a Comment