[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Despite offering important insights into how people actually make choices, behavioral
economics in some ways may explain too much. Lack of self-control makes intuitive
sense as an explanation for low savings, but how do we then account for the many
countries with high rates of saving? Many Asian countries, for example, have saving
rates that average 30 to 40 percent of income. A traditional economic approach would
focus on differences in the returns to saving (perhaps due to differences in the way
taxes are structured in different countries), average family size, or the age distribution
of the population to explain why saving rates differ so markedly across countries. A
behavioral perspective suggests that cultural factors might also be important.
One area in which the insights of behavioral economics may be very useful is in
designing public policies to increase the level of saving. For example, behavioral
economists have identified the importance of the status quo effect (see Chapter 5),
which predicts that people resist changes to their current circumstances. In particular
they resist making choices that actively require a decision to be made. As a
consequence, when presented with a number of options, many people will simply
pick whatever option is the default—the one that is chosen automatically without
further action on their part. The status quo effect can help explain why many people
do not take advantage of some of the best ways to save for retirement, such as participating
in what is called a 401(k) plan. In 1978, section 401(k) of the U.S. Internal
Revenue Code created a new saving account that allowed workers to put aside some
of their income for retirement. Its big advantage is tax deferral: the worker pays
taxes not on the income put into the 401(k) or on any interest earned on the account
but on the money when it is taken out of the account—after the worker is retired, when
she usually has a lower tax rate. Many employers will match workers’ contributions
to 401(k) accounts, making them even more valuable. When workers are offered the
option to participate in a 401(k) plan via an automatic paycheck deduction, the
number that do so can depend on what the default option happens to be. If workers
must explicitly choose to sign up for the account, fewer end up participating than when
enrollment in the plan is automatic and deliberate action must be taken to opt out.
This is an example of the status quo effect at work—peoples’ choices are shaped not
just by their rational evaluation of the pros and cons of different options but also by
their reluctance to make changes. Policies designed to encourage saving need to
increase the incentives to save, as suggested by the economist’s basic model of
consumer choice; but to be fully effective, they also must take into account the status
quo effect.
Education and Human Capital
Why go to college? Many answers spring to mind, but to tackle this question from
an economic perspective, and to understand why educational choices are similar to
saving decisions, we will focus on the costs and benefits of education.
Education is one of the most important determinants of workers’ productivity.
Staying in school longer, which usually means delaying entry into the labor force,
increases expected annual income. On average, high school graduates earn more
than those without high school degrees; those with some college earn more than
EDUCATION AND HUMAN CAPITAL ∂ 203