Imagine this scenario: Somebody offers you $5,000 to save for a future financial goal,such as a vacation or home purchase. You can allocate the money across three accounts, all with the same interest rate. The first account comes with no restrictions, meaning you can withdraw the money whenever you want. The second account comes with a 10% penalty if you withdraw the money within the first year. The third account prohibits withdrawals within the first year. 

How would you allocate the $5,000? Economic theory predicts that most people, not wanting to limit access to their own money, would put the entire amount in the unrestricted account.

However, a new working paper (by John Beshears, James Choi, Christopher Harris, David Laibson, Brigitte Madrian and Jung Sakong ), suggests the opposite—that people actually prefer putting some of their money into accounts with severe restrictions. When these researchers asked a sample of Americans the same question posed above, approximately 80% put at least some of their money in one of the two accounts that made it much more costly (if not impossible) to withdraw the funds early.

In another version of the study, the researchers offered people only two accounts to choose from: the account with no withdrawal restrictions and a single restricted account. They now allocated nearly half of their money to the restricted account. What’s more, the amount of money they allocated increased with the level of restrictiveness. They even allocated money to the restricted account when it offered a lower interest rate than the unrestricted one.

In other words, restricted accounts are so appealing that people appear to be willing to give up money just to get one. And that willingness holds important clues to ways individuals, lawmakers and institutions may be able to close the gap between what experts say people should be saving for retirement and other financial goals and what they actually are saving.

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Protection from yourself

To understand why, you need to understand what accounts for the appeal of restricted accounts. One piece of evidence comes from a similar, older field study of Filipino households: After one year, the Filipino families that chose to use a restricted account increased their savings by 337% compared with a control group. They saved more because they weren’t able to spend; the restrictions were a necessary protection against the usual failures of self-control. 

The same logic applies to the American subjects in the Beshears study. Many of the people who chose to allocate money to the restricted accounts were aware of their limited self-control—it’s hard to save in a world that’s always trying to get you to buy—and so they chose financial products that made it easy to make the prudent choice. In short, they wanted to protect their future selves from their present selves.

Behavioral economists refer to such restricted accounts as “commitment devices.” Although commitment devices might violate the predictions of classical economics, they already are a staple of our financial lives.

Take retirement savings: Americans currently have nearly 15 trillion in assets in accounts such as 401(k) plans and IRAs, according to data from the Investment Company Institute, a trade group. Those types of accounts come with a 10% tax penalty if funds are withdrawn before a person turns 59½ years old. (Of course, these retirement savings accounts offer tax benefits, so the source of their popularity is multidimensional.)

This latest research suggests that it might be possible for lawmakers to make retirement accounts even more restrictive—and increase retirement savings—without reducing the appeal of such accounts to consumers. In the Beshears study, for instance, accounts with a 10% penalty were less desirable than accounts with a 20% penalty, which were less desirable than accounts that prohibited early withdrawals altogether. These people seemed to realize that a 10% early-withdrawal penalty wouldn’t be sufficient protection for their savings: they needed stronger restrictions to keep their savings safe.

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Commitment devices

The pull of immediate gratification is reflected in the data from existing 401(k) accounts. Consider 401(k) cash outs, which occur when people liquidate their retirement accounts before they reach retirement age. Research from Aon Hewitt, a human-resources consulting firm, shows that among people changing jobs, about one-third keep their 401(k) account at the original employer, one-third roll over the account into an IRA and another third liquidate it.

While people liquidate their accounts for a variety of reasons—some need the money, others just find liquidation easier than rolling it over—the vast majority of workers come to regret that decision. One recent survey by Warren Cormier of the Boston Research Group found that approximately 80% of people who liquidated their last retirement account regretted the decision, with 60% saying it was a “major” source of regret. Given this data, it shouldn’t be too surprising that many people want highly restricted savings accounts.

This returns us to the original question: How did you allocate your $5,000?

If you allocated a significant amount of money to the illiquid accounts, then you may want to consider making commitment devices part of your financial life. Whatever your goal—maybe it’s saving for a kitchen remodel, or finally paying off those credit cards—you can generate your own commitment device by imposing a penalty on yourself if you don’t follow the plan, and finding another person who can enforce the penalty if you break your promise to yourself. (There also are websites that can help you do this.) 

However you create it, a commitment device makes it possible to leverage your dislike of losses to increase your chances of future success. Sometimes, the best way to boost self-control is to acknowledge how little we have.