{"id":118404,"date":"2023-12-04T12:24:00","date_gmt":"2023-12-04T16:24:00","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=118404"},"modified":"2023-12-11T12:30:15","modified_gmt":"2023-12-11T16:30:15","slug":"nudges-in-behavioral-economics","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/nudges-in-behavioral-economics\/","title":{"rendered":"Nudges in Behavioral Economics: How to Influence Consumers"},"content":{"rendered":"\n<p>What are &#8220;nudges&#8221; in behavioral economics? How does nudging influence a consumer&#8217;s decision?<\/p>\n\n\n\n<p>Famous economist Richard H. Thaler believes that behavioral economics has important practical implications in everyday life. He believes it can help influence consumers for good with nudges.<\/p>\n\n\n\n<p>Find out what it means to &#8220;nudge&#8221; people in the world of finance.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-nudging-can-improve-consumers-decisions\"><strong>How \u201cNudging\u201d Can Improve Consumers\u2019 Decisions<\/strong><\/h2>\n\n\n\n<p>Thaler explains that in his book <a href=\"https:\/\/www.shortform.com\/app\/book\/nudge\/1-page-summary\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Nudge<\/em><\/a>, coauthored with Harvard Law professor Cass Sunstein, he argued that <strong>insights from behavioral economics can help us \u201cnudge\u201d consumers toward better choices<\/strong>, as measured by their preferences. In other words, behavioral economics can teach us how to help consumers make decisions that they <em>want <\/em>to make, but struggle to. In this article, we\u2019ll examine two such \u201cnudges\u201d in behavioral economics that have been implemented in the real world: Thaler\u2019s Save More Tomorrow plan and his reformulated letters to delinquent taxpayers in the UK.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-nudge-1-the-save-more-tomorrow-plan\">Nudge #1: The Save More Tomorrow Plan<\/h3>\n\n\n\n<p>Thaler\u2019s first nudge addressed a widespread problem in the US in the mid-1990s: Consumers were saving less for retirement than they wished to, by their own reports. The normal individual retirement accounts (IRAs), Thaler explains, had several problems. First, they required employees to fill out byzantine forms, selecting their interest rate and stock-to-bond allocations to opt into these retirement accounts. Second, they forced employees to see their retirement money taken out of their paycheck. And finally, they required employees to dedicate money to their retirement funds in the <em>present<\/em>, when humans have the weakest self-control, rather than deciding to add more to their retirement funds in the distant future.<\/p>\n\n\n\n<p>(Shortform note: Perhaps as a result of these IRAs in the 1990s and 2000s, personal savings rates in the US reached a low of <a href=\"https:\/\/fred.stlouisfed.org\/series\/PSAVERT\" target=\"_blank\" rel=\"noreferrer noopener\">around 1% of disposable income in July 2005<\/a>. And although these rates rose consistently in the 2010s, averaging around 9% of disposable income, data suggest that as of 2023, <a href=\"https:\/\/www.cnbc.com\/2023\/10\/03\/americans-are-saving-less-in-2023-im-concerned-top-economist-says.html#:~:text=Amid%20heightened%20economic%20uncertainty%2C%20Americans,U.S.%20Bureau%20of%20Economic%20Analysis.\" target=\"_blank\" rel=\"noreferrer noopener\">Americans are saving below 4% of their disposable income<\/a>. Thus, because experts <a href=\"https:\/\/www.tiaa.org\/public\/learn\/personal-finance-101\/how-much-of-my-income-should-i-save-every-month#:~:text=mean%20saving%20longer.-,At%20least%2020%25%20of%20your%20income%20should%20go%20towards%20savings,you%20to%20budget%20your%20money.\" target=\"_blank\" rel=\"noreferrer noopener\">generally recommend saving 10-15% of disposable income<\/a>, it seems that Americans are again saving too little for retirement.)<\/p>\n\n\n\n<p>Consequently, Thaler developed the <em>Save More Tomorrow <\/em>plan to address these three problems. Rather than requiring employees to fill out elaborate forms, Save More Tomorrow included an automatic enrollment. Rather than forcing employees to see the money leave their paycheck, Save More Tomorrow allowed them to increase their retirement rates after receiving a raise, making it <em>feel <\/em>like they weren\u2019t losing money. And rather than requiring employees to change their retirement rates now, the plan allowed them to automatically increase their rates in the future. Though it took time for Save More Tomorrow to catch on, Thaler reports that by 2011, 51% of employers offered some variation of it, and by 2013, it was estimated to help US employees save an additional $7.6 billion annually.<\/p>\n\n\n\n<p>(Shortform note: According to some experts, automatic enrollment plans such as <em>Save More Tomorrow <\/em>have yielded mixed results for low-income employees in particular. For example, one researcher found that while automatic enrollment plans increase lower-income employees\u2019 savings, it <a href=\"https:\/\/www.aei.org\/wp-content\/uploads\/2019\/05\/Biggs-JOR-How-Hard-Should-We-Push-the-Poor-to-Save.pdf?x91208\" target=\"_blank\" rel=\"noreferrer noopener\">also causes them to incur more debt to cover expenses in the meantime<\/a>. Consequently, it\u2019s possible that automatic enrollment plans actually cause these employees to <em>oversave<\/em>, as they might be better off relying on Social Security benefits for retirement.)<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-nudge-2-letters-to-delinquent-taxpayers\">Nudge #2: Letters to Delinquent Taxpayers<\/h3>\n\n\n\n<p>Thaler\u2019s second nudge occurred in the UK, as the British government reached out to a team of behavioral scientists asking for assistance drafting letters to delinquent taxpayers. Thaler\u2019s goal was to draft a letter that was more effective at soliciting payments from delinquent taxpayers, thus saving the British government the expense of using a collection agency. So, along with his fellow behavioral scientists, Thaler used a key insight from behavioral economics: If you\u2019re trying to increase individuals\u2019 compliance with a rule, the best strategy is reminding them that most other people comply with the rule.&nbsp;<\/p>\n\n\n\n<p>(Shortform note: The insight that people are more likely to comply with a rule if they know others comply with it stems from a 2008 experiment, in which researchers tested the <a href=\"https:\/\/academic.oup.com\/jcr\/article-abstract\/35\/3\/472\/1856257?redirectedFrom=fulltext\" target=\"_blank\" rel=\"noreferrer noopener\">effectiveness of different messages to get guests to reuse their towels in hotel bathrooms<\/a>. These researchers found that the most effective message simply informed guests that the vast majority (about 75%) of other guests who had stayed in the same room had reused their towels. By contrast, messages that exhorted guests to reuse their towels because of the environmental benefits alone were significantly less effective.)<\/p>\n\n\n\n<p>Through several experiments, the team discovered that the most effective letters relayed two facts to delinquent taxpayers: The vast majority of British citizens pay their taxes on time, and you haven\u2019t paid yours on time. As Thaler relates, in the three weeks after this reformulated letter was sent to taxpayers, it increased tax revenue for the British government by around \uffe19 million (around $14.3 million using the <a href=\"https:\/\/www.exchangerates.org.uk\/GBP-USD-spot-exchange-rates-history-2012.html\" target=\"_blank\" rel=\"noreferrer noopener\">average exchange rate<\/a> for 2012, <a href=\"https:\/\/behavioralpolicy.org\/wp-content\/uploads\/2017\/06\/Sanders-web.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">when the letter was first introduced<\/a>).<\/p>\n\n\n\n<p>(Shortform note: According to experts, Thaler\u2019s straightforward letter is representative of a <a href=\"https:\/\/www.reuters.com\/article\/us-usa-tax-behavior-idUSBRE89S0DD20121029\" target=\"_blank\" rel=\"noreferrer noopener\">broader movement toward using simplified language in tax forms<\/a>. In so doing, tax officials believe that the crucial aspects of tax forms\u2014in this case, that delinquent taxpayers need to pay their taxes\u2014will be made clearer and thus more understandable for taxpayers.)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are &#8220;nudges&#8221; in behavioral economics? How does nudging influence a consumer&#8217;s decision? Famous economist Richard H. Thaler believes that behavioral economics has important practical implications in everyday life. He believes it can help influence consumers for good with nudges. Find out what it means to &#8220;nudge&#8221; people in the world of finance.<\/p>\n","protected":false},"author":14,"featured_media":118858,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,9],"tags":[1336],"class_list":["post-118404","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money","category-psychology","tag-misbehaving","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Nudges in Behavioral Economics: How to Influence Consumers - Shortform Books<\/title>\n<meta name=\"description\" content=\"Just like you&#039;d nudge someone to make an ethical choice, you can nudge people for economic reasons. 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