Richard Thaler wrote an article in the N.Y. Times about how our behavior doesn’t always mesh with economic theory. Basically, our behavior conflicts with their math.
Thaler studies the idea of using nudges to get people to do something they wouldn’t normally do. Really, nudges lower or remove the friction that’s holding us back. These are things we know we should do. We know it’s a good idea. We just don’t want to do it…yet. Friction, of course, is whatever is stopping us from doing all the things we should do.
Take exercise. I should do it, but I don’t have the time, it’s too much work, a gym costs too much, I don’t know where to start, and I’ll just change my diet instead. It’s all excuses because I want to sit on the couch a lot more than I want to workout. And it’s easier to just put it off till tomorrow. A nudge would push me past those first objections.
You still have to continue exercising once you’ve started. Maybe you use something like the Fitbit as a nudge to get your 10,000 steps for the day. I’m sure there are apps that gamify exercise too. It’s easier if you “want it”, see and feel the results, and can imagine your destination. But that first nudge gets you started.
Of course, nudges can work against you too. Advertisers use subtle nudges to make you feel like you’re missing out or don’t fit in unless you own this awesome gadget that does all kinds of stuff. Or they make a higher priced item seem like a great deal. It plays on your emotions to ignore commons sense.
Companies use nudges on anything that defaults to auto-bill pay, auto-renewal, and paperless billing.
Thaler gives an example for saving. More companies now use a default nudge to auto-enroll employees into their retirement account. The alternative stuck people with the decision to fill out paperwork, decide how much to contribute, pick funds, and question the uncertainty of it all or do nothing.
Guess what won? Tomorrow did again.
Thaler’s nudge changed the decision. For those companies, new employees now have the decision to opt-out of the plan or do nothing. Instead of having a large number never signing up, only a small number actually opt out.
There’s still the small issue of employees leaving the company and forgetting they opted in. Or maybe that’s just the nudge they need to not touch their money for the next few decades.
Last Call
- We’re All Smart. And Dumb. Sometimes. – BloombergView
- Make Fewer Decisions – Above the Market
- These Simple Moves By Your Employer Can Dramatically Improve Your Retirement – Time
- Outsmart Your Own Biases – HBR
- Speaking the Language of Risk – C. Richards
- Investors today Have More Options, and More Responsibility – C. Benz
- “Vanity Capital” is the New Metric for Narcissism – Quartz
- New Math for Retirees and the 4% Withdrawal Rule – NY Times
- Tomorrow’s Advance Man: Marc Andreessen’s Plan to Win the Future – The New Yorker
- Lotteries: America’s $70 Billion Shame – The Atlantic
