This past summer I started the MPC Book Club to keep up on my financial literacy. This is a book report on Nudge: Improving Decisions About Health, Wealth, and Happiness, which was the book we read for August.
As a disclaimer, this review of the book is based off of my opinions alone. I think literature is like art. Because we all have a different lens, or perspective, we likely each would take away different important facts from reading the same book.
Overall, I thought Nudge was fascinating to read. It has been 12 years since Nudge was written. It provided great food-for-thought, and reminded me of how finance can change significantly. Most of all we need to be aware of the nudges that are happening in life and ensuring that the nudges work to our advantage.
Key Point to Nudge
The biggest takeaway I have from the book is that it is critical that default options be the best option for the majority or the vast majority of people applicable to the situation.
As humans we are busy, and while we like to think we are experts at everything we are not. Throughout the book it highlights that individuals, the vast majority of the time, go with the default setting. Additionally, even if we select an option originally, we are likely to not update that option over time.
An example given in the book is that individuals starting a job without a spouse are most likely to list their mother as a beneficiary on the life insurance policy offered by their employer. Years later, after becoming married, the vast majority still have their mother listed as beneficiary on the insurance policy.
Another example is that employees fail to update life and health benefit choices during open enrollment periods. This means that whatever the employer has set as a default (i.e. continue the same coverage or default to no coverage) matters. Employers that default employees to no coverage, even if they had it before, could leave a lot of individuals without health insurance. The reason is that a lot of people don’t actively look at their options during open enrollment.
Biggest Takeaways from Nudge
1. For people that are in a position of power with respect to setting defaults (or a choice architect as called in the book), know it is a critical job.
For instance, you are a choice architect if you are on a 401(k) committee or if you are designing onboarding paperwork for new employees.
Making it a default that people contribute the minimum needed to get the maximum amount of employer match is a great nudge. People still have the option to opt out of contributing, but I think very few people would be upset that you wanted to help them save for retirement.
2. As employees and consumers we must know what defaults exist in our lives and ensure we aren’t letting someone else choose what is right for us.
To give a non-employee/employer example, think about your investment company. Does your investment company default to reinvesting dividends or does that money go into a money market fund? This is a default that is important to know to ensure you are 1. Diversifying investments over time or 2. Making sure your money is working for you like you want it to.
You may want dividend money to go to the cash account so you can use it for other purposes, but you may also not realize that the money is not working for you in the market in some capacity.
3. It takes a lot of practice, training, and repetition, to focus the Automatic System.
In the book, it says “the Automatic System is your gut reaction and the Reflective System is your conscious thought.” The Reflective System is what you are using when you are using critical thought, but the Automatic System is the thoughts that pop into your head as you are doing the laundry or dishes.
At MPower Co it is the Automatic System we are focusing on with respect to practicing positive psychology. This is why optimism can be a learned trait. It’s about practicing and repeating phrases that are in a tone reflecting gratitude, hope, happiness, etc.
4. Limit options.
As a society we are bombarded with information and options.
For instance, right now I’m very interested in following Social Media accounts that focus on child education and play. Because we are at home for Covid, I need help with that. There are a significant number of accounts for these purposes and thank goodness for them! However, following 10 accounts on these subjects gives me too many options and then I feel paralyzed with what to do.
Creating a rotation, only following three at a time gives me the information I need to engage my children and give me new ideas to help their development.
This can be applied to a number of different subjects like picking out new carpet. Ask the salesperson to pick three that they sell the most often, are the three choices they would choose between, or whatever criteria you want to give them. By limiting yourself to three options it can help you minimize the anxiety of what feel like big decisions and help you move forward.
5. Maine’s Intelligent Assignment Program is genius.
Part D of Medicare has a significant number of prescription drug plans to choose from. In Maine, the state implemented a program to compare the past three months prescriptions for individuals to the plans offered. The State’s program would compare how the different plans would work and the cost to the individuals under each plan.
The individuals would then automatically be enrolled in the most economically advantageous plan. Individuals of course had the option to opt out or to choose a different plan if they chose. Some other states just used random assignments.
I wonder how many people would benefit financially from intelligent assignment? I wonder how many other situations that intelligent assignment could be applied to that would increase individuals wellbeing.
My Favorite Quotes From Nudge
This book report on Nudge wouldn’t be complete without some of my favorite quotes from the book:
- “It is legitimate for choice architects to try to influence people’s behavior in order to make their lives longer, healthier, and better….as judged by themselves.”
- “People have a strong tendency to go along with the status quo or default option.”
- “If private companies or public officials think that one policy produces better outcomes, they can greatly influence the outcome by choosing it as the default.”
- “It turns out that the ‘hot hand’ is just a myth. Players who have made their last few shots are no more likely to make their next shot.”
- “Loss aversion operates as a kind of cognitive nudge, pressing us not to make changes, even when changes are very much in our interests.”
- “Offering people forty-six choices and telling them to ask for help is likely to be about as good as no help at all.”
- “The more choices there are, and the more complex the situation, the more important it is to have enlightened choice architecture.”
- “Those who pollute (meaning all of us) do not pay the full costs that we impose on the environment, and those of us who are harmed by pollution (again, all of us) usually lack any feasible way to negotiate with polluters to get them to clean up their acts.”
- “When people are not in a position to make voluntary agreements, most libertarians tend to agree that government might have to intervene.”
- “Incentive based approaches are more efficient and more effective [than command and control regulation] and they also increase freedom of choice.”
- “Most Americans seem to believe that children do have a right to a good education; there is a consensus on that point. One reason for that consensus is that educated people are more free.”
- “Medical liability insurance tends not to be experience rated, which means that a doctor will pay the same premium no matter how many times he has been sued for malpractice.”
- “When you are married, you get many material benefits, economic and noneconomic.”
- “What are the appropriate default rules for people who make a commitment to each other?”
- “No sensible choice architect would design the current income tax system, which is famous for its complexity.”
- “Estimates [on conducting Automatic Tax Returns indicate] this proposal would save taxpayers up to 225 million hours of tax preparation time and more than $2 billion a year in tax preparation fees.”
- “Many people have strong charitable impulses, and we suspect that because of inertia they give far less than they actually want to give.”
- “Seemingly small features of social situations can have massive effects on people’s behavior; nudges are everywhere, even if we do not see them.”
- “Choice architects cna preserve freedom of choice while also nudging people in directions that will improve their lives.”
Final Thoughts on Nudge
First of all, the book was written in 2008. It was fascinating to read the authors’ thoughts about Social Security and Privatising Marriage. In 2020, it seems like we are in a completely different era on these topics. So, it was fascinating going back in time a bit. It’s a reminder, though, that personal finance changes significantly.
If you aren’t staying up to date with changes in the finance world, you need to surround yourself with professionals that are.
Finally, at MPower Co we think it is critical that you be the CEO of your finances. You may have people guiding and informing you, but don’t let default settings be the deciding factor on whether you have health insurance next year. Don’t let others decide how much you are putting aside for retirement. Own your finances. Own your future. Make choices, revisit them over time and adjust as necessary.
We cannot put our financial lives on autopilot for decades.
Join the #MPCBookClub
If you liked this book report on Nudge, think of getting in on our real time financial literacy discussions! The MPC Book Club is informal! Each month I choose a different financial or positive psychology book. Each Sunday night on Facebook I post a dialogue box about the book and then I do a Live typically each Monday with thoughts I have taken away from the book.
Join in on the discussion by following us on Facebook. I highly recommend picking up the book from your local library if you can or at your local bookstore! I’m looking forward to seeing your comments in our next MPC Book Club posts and discussions.