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I'm going to talk today about saving more,

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but not today, tomorrow.

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I'm going to talk about Save More Tomorrow.

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It's a program that Richard Thaler

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from the University of Chicago and I

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devised maybe 15 years ago.

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The program, in a sense,

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is an example of behavioral finance

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on steroids --

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how we could really use behavioral finance.

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Now you might ask, what is behavioral finance?

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So let's think about how we manage our money.

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Let's start with mortgages.

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It's kind of a recent topic,

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at least in the U.S.

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A lot of people buy

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the biggest house they can afford,

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and actually slightly bigger than that.

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And then they foreclose.

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And then they blame the banks

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for being the bad guys who gave them the mortgages.

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Let's also think about

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how we manage risks --

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for example, investing in the stock market.

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Two years ago, three years ago, about four years ago,

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markets did well.

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We were risk takers, of course.

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Then market stocks seize

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and we're like, "Wow.

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These losses, they feel, emotionally,

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they feel very different

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from what we actually thought about it

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when markets were going up."

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So we're probably not doing a great job

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when it comes to risk taking.

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How many of you have iPhones?

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Anyone? Wonderful.

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I would bet many more of you

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insure your iPhone --

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you're implicitly buying insurance by having an extended warranty.

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What if you lose your iPhone?

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What if you do this?

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How many of you have kids?

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Anyone?

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Keep your hands up

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if you have sufficient life insurance.

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I see a lot of hands coming down.

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I would predict,

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if you're a representative sample,

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that many more of you

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insure your iPhones than your lives,

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even when you have kids.

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We're not doing that well when it comes to insurance.

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The average American household

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spends 1,000 dollars a year

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on lotteries.

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And I know it sounds crazy.

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How many of you spend a thousand dollars a year on lotteries?

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No one.

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So that tells us that the people not in this room

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are spending more than a thousand

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to get the average to a thousand.

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Low-income people

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spend a lot more than a thousand on lotteries.

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So where does it take us?

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We're not doing a great job managing money.

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Behavioral finance is really a combination

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of psychology and economics,

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trying to understand

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the money mistakes people make.

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And I can keep standing here

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for the 12 minutes and 53 seconds that I have left

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and make fun of all sorts of ways

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we manage money,

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and at the end you're going to ask, "How can we help people?"

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And that's what I really want to focus on today.

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How do we take an understanding

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of the money mistakes people make,

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and then turning the behavioral challenges

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into behavioral solutions?

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And what I'm going to talk about today

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is Save More Tomorrow.

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I want to address the issue

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of savings.

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We have on the screen

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a representative sample

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of 100 Americans.

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And we're going to look at their saving behavior.

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First thing to notice is,

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half of them

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do not even have access

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to a 401(k) plan.

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They cannot make savings easy.

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They cannot have money go away from their paycheck

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into a 401(k) plan

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before they see it,

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before they can touch it.

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What about the remaining half of the people?

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Some of them elect not to save.

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They're just too lazy.

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They never get around to logging into a complicated website

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and doing 17 clicks to join the 401(k) plan.

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And then they have to decide how they're going to invest

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in their 52 choices,

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and they never heard about what is a money market fund.

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And they get overwhelmed and the just don't join.

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How many people end up saving to a 401(k) plan?

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One third of Americans.

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Two thirds are not saving now.

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Are they saving enough?

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Take out those

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who say they save too little.

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One out of 10

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are saving enough.

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Nine out of 10

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either cannot save through their 401(k) plan,

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decide not to save -- or don't decide --

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or save too little.

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We think we have a problem

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of people saving too much.

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Let's look at that.

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We have one person --

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well, actually we're going to slice him in half

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because it's less than one percent.

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Roughly half a percent of Americans

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feel that they save too much.

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What are we going to do about it?

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That's what I really want to focus on.

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We have to understand

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why people are not saving,

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and then we can hopefully flip

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the behavioral challenges

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into behavioral solutions,

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and then see how powerful it might be.

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So let me divert for a second

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as we're going to identify the problems,

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the challenges, the behavioral challenges,

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that prevent people from saving.

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I'm going to divert and talk about bananas and chocolate.

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Suppose we had another wonderful TED event next week.

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And during the break

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there would be a snack

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and you could choose bananas or chocolate.

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How many of you think you would like to have bananas

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during this hypothetical TED event next week?

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Who would go for bananas?

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Wonderful.

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I predict scientifically

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74 percent of you will go for bananas.

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Well that's at least what one wonderful study predicted.

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And then count down the days

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and see what people ended up eating.

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The same people that imagined themselves

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eating the bananas

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ended up eating chocolates

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a week later.

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Self-control

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is not a problem in the future.

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It's only a problem now

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when the chocolate is next to us.

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What does it have to do with time and savings,

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this issue of immediate gratification?

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Or as some economists call it, present bias.

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We think about saving. We know we should be saving.

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We know we'll do it next year, but today let us go and spend.

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Christmas is coming,

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we might as well buy a lot of gifts for everyone we know.

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So this issue of present bias

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causes us to think about saving,

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but end up spending.

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Let me now talk

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about another behavioral obstacle to saving

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having to do with inertia.

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But again, a little diversion

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to the topic of organ donation.

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Wonderful study comparing different countries.

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We're going to look at two similar countries,

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Germany and Austria.

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And in Germany,

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if you would like to donate your organs --

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God forbid something really bad

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happens to you --

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when you get your driving license or an I.D.,

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you check the box saying,

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"I would like to donate my organs."

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Not many people like checking boxes.

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It takes effort. You need to think.

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Twelve percent do.

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Austria, a neighboring country,

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slightly similar, slightly different.

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What's the difference?

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Well, you still have choice.

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You will decide

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whether you want to donate your organs or not.

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But when you get your driving license,

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you check the box

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if you do not want to donate your organ.

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Nobody checks boxes.

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That's kind of too much effort.

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One percent check the box. The rest do nothing.

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Doing nothing is very common.

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Not many people check boxes.

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What are the implications

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to saving lives

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and having organs available?

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In Germany, 12 percent check the box.

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Twelve percent are organ donors.

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Huge shortage of organs,

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God forbid, if you need one.

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In Austria, again, nobody checks the box.

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Therefore, 99 percent of people

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are organ donors.

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Inertia, lack of action.

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What is the default setting

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if people do nothing,

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if they keep procrastinating, if they don't check the boxes?

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Very powerful.

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We're going to talk

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about what happens if people are overwhelmed and scared

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to make their 401(k) choices.

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Are we going to make them automatically join the plan,

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or are they going to be left out?

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In too many 401(k) plans,

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if people do nothing,

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it means they're not saving for retirement,

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if they don't check the box.

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And checking the box takes effort.

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So we've chatted about a couple of behavioral challenges.

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One more before we flip the challenges into solutions,

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having to do with monkeys and apples.

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No, no, no, this is a real study

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and it's got a lot to do with behavioral economics.

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One group of monkeys gets an apple, they're pretty happy.

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The other group gets two apples, one is taken away.

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They still have an apple left.

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They're really mad.

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Why have you taken our apple?

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This is the notion of loss aversion.

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We hate losing stuff,

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even if it doesn't mean a lot of risk.

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You would hate to go to the ATM,

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take out 100 dollars

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and notice that you lost one of those $20 bills.

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It's very painful,

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even though it doesn't mean anything.

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Those 20 dollars might have been a quick lunch.

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So this notion of loss aversion

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kicks in when it comes to savings too,

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because people, mentally

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and emotionally and intuitively

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frame savings as a loss

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because I have to cut my spending.

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So we talked about

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all sorts of behavioral challenges

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having to do with savings eventually.

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Whether you think about immediate gratification,

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and the chocolates versus bananas,

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it's just painful to save now.

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It's a lot more fun

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to spend now.

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We talked about inertia and organ donations

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and checking the box.

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If people have to check a lot of boxes

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to join a 401(k) plan,

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they're going to keep procrastinating

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and not join.

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And last, we talked about loss aversion,

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and the monkeys and the apples.

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If people frame mentally

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saving for retirement as a loss,

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they're not going to be saving for retirement.

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So we've got these challenges,

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and what Richard Thaler and I

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were always fascinated by --

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take behavioral finance,

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make it behavioral finance on steroids

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or behavioral finance 2.0

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or behavioral finance in action --

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flip the challenges into solutions.

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And we came up with an embarrassingly simple solution

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called Save More, not today, Tomorrow.

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How is it going to solve the challenges

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we chatted about?

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If you think about the problem

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of bananas versus chocolates,

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we think we're going to eat bananas next week.

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We think we're going to save more next year.

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Save More Tomorrow

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invites employees

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to save more maybe next year --

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sometime in the future

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when we can imagine ourselves

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eating bananas,

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volunteering more in the community,

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exercising more and doing all the right things on the planet.

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Now we also talked about checking the box

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and the difficulty of taking action.

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Save More Tomorrow

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makes it easy.

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It's an autopilot.

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Once you tell me you would like to save more in the future,

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let's say every January

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you're going to be saving more automatically

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and it's going to go away from your paycheck to the 401(k) plan

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before you see it, before you touch it,

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before you get the issue

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of immediate gratification.

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But what are we going to do about the monkeys

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and loss aversion?

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Next January comes

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and people might feel that if they save more,

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they have to spend less, and that's painful.

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Well, maybe it shouldn't be just January.

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Maybe we should make people save more

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when they make more money.

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That way, when they make more money, when they get a pay raise,

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they don't have to cut their spending.

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They take a little bit

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of the increase in the paycheck home

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and spend more --

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take a little bit of the increase

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and put it in a 401(k) plan.

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So that is the program,

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embarrassingly simple,

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but as we're going to see,

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extremely powerful.

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We first implemented it,

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Richard Thaler and I,

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back in 1998.

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Mid-sized company in the Midwest,

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blue collar employees

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struggling to pay their bills

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repeatedly told us

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they cannot save more right away.

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Saving more today is not an option.

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We invited them to save

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three percentage points more

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every time they get a pay raise.

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And here are the results.

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We're seeing here a three and a half-year period,

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four pay raises,

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people who were struggling to save,

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were saving three percent of their paycheck,

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three and a half years later

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saving almost four times as much,

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almost 14 percent.

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And there's shoes and bicycles

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and things on this chart

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because I don't want to just throw numbers

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in a vacuum.

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I want, really, to think about the fact

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that saving four times more

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is a huge difference

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in terms of the lifestyle

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that people will be able to afford.

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It's real.

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It's not just numbers on a piece of paper.

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Whereas with saving three percent,

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people might have to add nice sneakers

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so they can walk,

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because they won't be able to afford anything else,

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when they save 14 percent

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they might be able to maybe have nice dress shoes

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to walk to the car to drive.

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This is a real difference.

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By now, about 60 percent of the large companies

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actually have programs like this in place.

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It's been part of the Pension Protection Act.

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And needless to say that Thaler and I

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have been blessed to be part of this program

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and make a difference.

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Let me wrap

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with two key messages.

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One is behavioral finance

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is extremely powerful.

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This is just one example.

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Message two

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is there's still a lot to do.

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This is really the tip of the iceberg.

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If you think about people and mortgages

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and buying houses and then not being able to pay for it,

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we need to think about that.

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If you're thinking about people taking too much risk

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and not understanding how much risk they're taking

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or taking too little risk,

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we need to think about that.

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If you think about people spending a thousand dollars a year

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on lottery tickets,

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we need to think about that.

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The average actually,

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the record is in Singapore.

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The average household

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spends $4,000 a year on lottery tickets.

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We've got a lot to do,

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a lot to solve,

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also in the retirement area

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when it comes to what people do with their money

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after retirement.

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One last question:

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How many of you feel comfortable

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that as you're planning for retirement

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you have a really solid plan

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when you're going to retire,

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when you're going to claim Social Security benefits,

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what lifestyle to expect,

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how much to spend every month

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so you're not going to run out of money?

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How many of you feel you have a solid plan for the future

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when it comes to post-retirement decisions.

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One, two, three, four.

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Less than three percent

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of a very sophisticated audience.

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Behavioral finance has a long way.

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There's a lot of opportunities

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to make it powerful again and again and again.

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Thank you.

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(Applause)