“Nudge Theory” and Retirement

American economist Richard H. Thaler won the 2017 Nobel Prize in Economics for his groundbreaking work on “nudge theory.” Thaler is known as the “father of behavioral economics,” which in recent years has successfully challenged traditional concepts of mainstream economics.1

Historical economic theory has assumed that people behave rationally when it comes to financial decisions. However, if you’ve ever made an impulsive purchase, you’re probably well-aware that this assumption isn’t always true. Thaler was one of the first and most influential economists to point out and prove that feelings, fears and impulses often motivate our financial decisions.2

Thaler has made a science out of channeling our predictable behaviors into more positive actions. For example, it was Thaler’s research on nudge theory that led Congress to change the rules on 401(k) plans to allow employers to automatically enroll workers in their plans, rather than asking them to. The theory assumes that workers want to save for retirement but might need a nudge, so the plan forces them to “opt-out” of participation rather than opt-in. By making the action a negative instead of a positive, participation has increased in employer retirement savings plans.3

In other words, people sometimes need a nudge to offset less rational behaviors.

1 Knowledge@Wharton. Oct. 10, 2017. “How Richard Thaler’s ‘Simple Insights’ Led to a Nobel Prize.” http://knowledge.wharton.upenn.edu/article/how-richard-h-thalers-clear-thinking-led-to-a-nobel-prize-in-economics/. Accessed Oct. 19, 2017.

2 Ibid.

3 Ian Salisbury. Money. Oct. 9, 2017. “Meet Richard Thaler, the Man Who Just Won the Nobel Prize for Helping You Save for Retirement.” http://time.com/money/4974462/thaler-nobel-economist-retirement-savings-nudge/. Accessed Nov. 6, 2017.