Thursday, May 27, 2010

Save More Tomorrow

The best-known example of a nudge from Thaler and Sunstein is "Save More Tomorrow."

Most Americans say they want to put more money away in savings accounts, but few do it. If you offer employees an option to select automatic savings from their paychecks, most will say they are for it, but only about a fifth will actually get around to setting it up. However, if the default is that they are all signed up for an automatic savings deduction of, say, 2%, unless they opt out, 90% will start savings.

And what has happened two years later, when the workers have had a chance to see that 2% flow out of their paycheck and into a savings account? 98% have joined the automatic savings plan.

That is a pretty good nudge.

The further nudge of Save More Tomorrow is that every time you get a raise, a hunk of it is added to your savings deduction, before you ever see it in a paycheck. Then your savings starts to really build up - and you never miss it.

1 comment:

Anonymous said...

From Democracy in America, by Alexis de Tocqueville:

"After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd."

The part about "The will of man is not shattered, but softened, bent, and guided;" seems to be exactly what Sunmstein is doing with his "nudging".