How To Nudge People To Make Better Financial Decisions

This post is about how to nudge people into better financial decisions.

Years ago, I worked at a Fortune 500 company, which provided an excellent 401k match. Put a percentage of your income into the 401k, and the company matches it 100%. What an excellent way to save for the future. I signed up right away. Later, I found out I was in the minority. Only a small percentage of employees took the match option. What would stop them from seizing what was basically free money?

People and Decision Making

Many factors might have gotten in the way when my fellow employees chose not to enroll in the 401k. For example, we humans like to think we are rational and unbiased. But really, we are irrational and biased.

Life is complex, and we are forced to make many daily decisions. Some are easy, but for those that are complex, we rely on assumptions that are not always helpful. For example, we:

• are prone to stay with the status quo instead of making change,
• tend to watch what other people do and follow their lead,
• aren’t very good at evaluating risk, and
• tend to be overconfident in our decisions.

In the case of the 401k example, I found that my company was not alone in low enrollment. In most companies, only about 30% take the match. Even in cases where the pension match required no contribution, only about half of employees signed up!

Humans need nudges.

What is a Nudge?

Behavioral economics (the mix of psychology and economics) is a relatively new field that explores why people don’t behave rationally when they know they should. People know they should exercise, but they don’t. They eat a lot of ranch dressing when they know they shouldn’t. People don’t save when they know they should.

A nudge is a way to help people make better decisions.

What Behavior Can You Nudge?

I learned that men need to be nudged toward better aim at urinals. At the Amsterdam airport, pictures of bees are placed at the bottom of urinals to decrease the amount of cleaning required in the men’s room.

Apparently, men like to urinate on something, and the bee target increases aim and reduces cleaning costs. This approach has been used throughout history. Nudging isn’t new—at least for men!

Here are some nudges that have been shown to work:

• Rearranging the order of food in the school cafeteria leads to kids choosing healthier food.
• Getting feedback about their neighbor’s energy consumption makes people use less energy.
• If nudged into making a plan, people are more likely to follow through on something important, like getting a tetanus shot or voting.
• Nudging hotel guests to reuse their towels saves energy costs.

When Should You Nudge?

Consider nudging when the decision is complex and rare, and the nudge is beneficial. Examples include:

• Financial planning
• Health plan enrollment
• Organ donation opt-in
• Energy use
• College choice

A Nudge Toward Financial Viability

I volunteer as a credit union treasurer and care deeply about helping people reach financial viability.

When it comes to financial viability, humans have a long way to go. But nudges are helping. While some research suggests that financial education does not impact behavior, just-in-time interventions (nudges) work.

• Nudging homebuyers to shop around for a mortgage saves an average of $1400 in fees.
• Asking people to pre-pay debt works.
• Telling people saving is ‘for family’ increases deposits.
• Nudging overconfident investors to talk to at least one other person results in better financial decisions.

And now there are many financial viability tools to nudge you. Examples include:

• Self-control cards that help consumers limit spending.
• Debit cards that help increase credit scores.
• Apps that round up a purchase amount and put the difference in your savings account.

[Interested in consumer activism? Follow the 5-step Activism Path and start making a difference.]

My Fellow Employees Needed a Nudge

The people I worked with years ago really needed a nudge. I wonder how they are doing decades later compared to employees who took the match. Consider the results from a 401k calculator.

1. No enrollment (majority of employees) = $0
2. Enrollment but no match = $432,111
3. Enrollment plus match = $864,222

These days some companies use a nudge to encourage employees. They switch the enrollment options. The company enrolls employees automatically, but they can opt-out. Most stay in the plan, ensuring themselves a better future.

Good and Bad Nudges

You may be wondering if nudges can be used for evil instead of good.

Yes. A terrible example is the Jonestown massacre, where people were nudged into drinking the Kool-Aid that killed them.

Opponents of nudging believe the practice is paternalistic and people should be allowed to freely make decisions. While I partly agree with this sentiment, it is hard to see a credit union member continue to make poor financial decisions.

One way to ensure you are getting nudged by people motivated to help you is to join a credit union. Credit unions focus on the member; banks focus on their shareholders. Most credit unions offer services comparable to banks, including financial planning. Locate and research a credit union near you. Join and get on the path to a better financial future.

Yes, that was a nudge.

READ NEXT

At the Intersection of Nudging and Religion

What Is a Credit Union and How Can It Help Me?

Four Ways to Be a Savvy Consumer

Nudge: improving decisions about health, wealth, and happiness by Richard H. Thaler and Cass R. Sunstein. In the years since the first edition was published, Thaler won the Nobel Prize in Economics.

In 1974 researchers Daniel Kahneman and Amos Tversky wrote a paper about how people make judgments that influenced behavioral economics. Here is a short video (4:53) that summarizes their work: