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Everyone Needs a Little Nudge (Gwen Moritz Editor’s Note)

4 min read

Richard Thaler was already a rock star among economists before he was awarded the Nobel Memorial Prize in Economic Sciences last week. His practical studies of behavioral economics — how people really interact with money — influenced Congress to improve the 401(k) law. The University of Chicago professor co-wrote a best-selling book, “Nudge,” about small ways people can be encouraged to improve their lives. He had a cameo with Selena Gomez, for Pete’s sake, in the brilliant “The Big Short.”

Like all rock stars, he has his critics. Particularly on the political right, where his talk of “libertarian paternalism” is still too paternalistic (and oxymoronic). On The Weekly Standard’s podcast, writer Andrew Ferguson complimented the new laureate’s writing style and then proceeded to discount the work that persuaded the prize committee.

I’m not qualified to say whether there are holes in Thaler’s research, but his observation that humans aren’t nearly as rational in their economic decisions as traditional theories had assumed matches my experience. (Remember that great Lending Tree commercial? “How do I do it? I’m in debt up to my eyeballs.”) And his conclusion — that we should make it easier for people to reach their goals — is simply good management.

Thaler talks a lot about what he calls “choice architecture” — the way the environment in which we make choices is designed — and a favorite example of this is a school cafeteria. Since the cafeteria manager has to arrange the food in some order, can it be done in a way that “nudges” children to make better choices? Getting children to eat more vegetables and fewer rolls (the best part of school lunch when I was a kid) is a desirable outcome, and making that an easier choice would be an example of choice architecture.

“Have they ever had children?” host Eric Felten asked Ferguson on the podcast. Well, no one ever said children were rational. But any retailer will tell you that product placement absolutely influences behavior. If you want to see choice architecture on full display, check out the candy in the checkout lanes at stores as disparate as Best Buy, Michaels and Stein Mart.

But choice architecture need not be actual architecture. Buying stuff on Amazon is almost too easy, isn’t it? Here’s that thing you are looking for, and here are the things that other people frequently buy at the same time. Contrast that with the sites that take you to your “shopping cart” page each time you add an item or, worse, make you click a button if you want to continue shopping. On Amazon, continuing to shop is the default setting, but when you decide to check out, you can do it with one click.

That kind of choice architecture may be as much for the retailer’s benefit as for the customer. It was paternalistic choice architecture — the default setting on 401(k)s — that first brought Thaler’s ideas into the public eye. In 2006, Congress tweaked the law to encourage employers to enroll employees in retirement savings plans unless they specifically opted out, just as Thaler recommended.

This is a perfect example of “libertarian paternalism.” Employees are still free to choose not to save for retirement. But since most people will have to save religiously to avoid being destitute in old age, saving should be the easier path and not saving should require a deliberate decision — not vice versa.

And getting this one decision right is ridiculously important because inertia is the first law of behavioral economics. In 2015, Vanguard Research reported that automatic enrollment increased 401(k) participation rates by new hires from 42 percent to 91 percent. And when people start participating, most of them (8 in 10) increase their contribution rates over time — either automatically, if that’s part of the plan offering, or on their own. But just as important: 7 in 10 never change their default investment fund.

My son started his first college-graduate job in June, and on Oct. 1 was automatically enrolled in the 401(k). The default savings rate is 6 percent, which will get him an equal match from his very generous employer. But because he’s young and single and unencumbered, Mom suggested bumping it up to 10 percent while it’s easy. Just a little nudge.


Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.
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