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Do you need a little Nudge?

January 22, 2013

This semester I’m taking a graduate class where I need to do a lot of research.  I haven’t been blogging in a while and I need to keep track of the articles and books I read so I thought I would share them on here.

The first book I read was Nudge by Richard Thaler and Cass Sunstein (2009).  These are two leading behavioral finance experts with Richard Thaler being a distinguished professor at the University of Chicago’s Graduate School of Business and Cass Sunstein being a law professsor at Harvard (I guess those are O.K. schools).

The basic premise of the book is we should have the freedom to choose what we want, but organizations should help us in our choices by giving us a wise default.  The term they use for this is liberal paternalism.  For example, if you started working for a company they would automatically enroll you in the 401(k) plan instead of you having to choose to enter the 401(k) plan.  If you wanted to opt out you could, but the default option would be to be enrolled.  They cite one story by Madrian and Shea (2001) that points out that when individuals had to opt in to the retirement program there was a 20% enrollment rate after three months and a 65% rate after thirty six months.  When individuals were automatically enrolled there was a 90% enrollment rate after three months and a 98% rate after thirty six months.

Thaler and Sunstein go on to show how a nudge can be used to help the public good in everything from investing, to the Medicare Part D plan, to organ donors, to school choice.  These nudges are needed because of our thought processes.  The way our brain is wired we sometime make decisions that aren’t in our best interest because it is a little more convenient at the current time.  These nudges don’t take away our freedom not to be nudged, but make us work a little harder to choose the lesser option.

When looking at your own life are there defaults you can set up to help you.  For example, if you aren’t saving for retirement, can you set up an automatic withdrawal into an IRA that would happen every month without you having to do a thing?  If you have trouble with snacking food that isn’t the best for you, can you surround yourself with raisins and carrots so you are snaking on something healthy instead of chips and cookies?  If there is a certain bad habit you have, how can you change your environment to make it more difficult for you to partake in that habit?

This was a great book to start out with my research.  It really has made me think about my environment from what I do with my money to my eating habits.  I plan to use some of the ideas of liberal paternalism to help improve my life.

Let me know how you change your environment to make yourself make wise decisions because it is the default option.

Works Cited

Mandrian, B.C. and D.F. Shea.  (2001) “The Power of Suggestion:  Inertia in 401(k) Participation and Savings Behavior.”  Quarterly Journal of Economics  116:  1149-1225.

Thaler, R.H. and C.R. Sunstein.  (2009) Nudge.  New York:  Penguin Group.

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3 Comments leave one →
  1. Terry Rooster permalink
    January 22, 2013 11:06 pm

    I think I don’t need a nudge, but maybe that’s what everyone thinks? Does the book address what our self perceptions are, relative to truth?

    • January 23, 2013 5:40 am

      Great question Terry. I’ll write a little more on the mindset of most people later that was the first part of the book. Check back later this week.

  2. Jim Jackson permalink
    January 23, 2013 6:41 am

    I ~think~ we’re doing just fine, but could probably use a nudge to help us improve. Interesting stats!

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