All You Need is a Nudge

One month on from the previous post.

This time my excuse is that shift work has begun for me and it threw my personal schedule a little out of whack. News came out today that Richard Thaler was awarded the Nobel Prize in Economics for his work on Behavioural Economics. I don't think i have read his books but i certainly have read a couple on Behavioural Finance.

http://www.channelnewsasia.com/news/business/commentary-nobel-prize-winner-richard-thaler-changed-economics-9295828

Thaler in his works, argued that people should not be forced to do things with bans or laws. Instead, small interventions, or nudges, that make the right choice easier are the best way to go.

I think this theme is rather similar to the notions delivered in Malcolm Gladwell's Tipping Point. My memory is vague but i recall a story within Tipping Point that talks about how adding a map on to a pamphlet resulted in marked increase in attendees for an event. Here, Thaler thinks that making automatic enrollment into retirement should be the default choice rather than opt-ins and that without help, most people would never retire. This auto-enrollment is also used in our HOTA act.

https://www.bloomberg.com/news/articles/2017-10-10/thank-richard-thaler-for-your-retirement-savings

I fully agree with him on this point. Our version of 401(k) would be CPF. Due to our mental accounting, if we didn't have compulsory contribution in CPF, many people will struggle with retirement.

The rest of that bloomberg article has a couple more gems including auto-escalation - a notion to gradually increase a nudge rather than a forceful change.  Another that stood out for me was investing too much into your company's stock is risky. It might come across as confirmation bias where i read only those points that agree with me. But i do appreciate that there could be people who worked for Apple, Amazon or Google. I guess, if you think the company you are working for will become half as big as those 3, you could invest in your company as much as you want.

This is not a post to idol-worship him. In the CNA article, they list 3 areas of work that Thaler did and i am going to throw some suggestions out here to nudge some readers to overcome these behaviours.

Limited Rationality
Nudge yourself to not think in buckets. See money as a tool and where it came from does not matter. A windfall is the same as a salary. Where to use the tool depends on where in your life needs it most.
This tool can be used now or in the future, can be used to buy experiences for immediate pleasure, or pay off debts to ease stress, or even saved for delayed gratification. This might be tough for people who are used to envelope budgeting to do. But budgeting should just be a guide for you to watch your spending and not overdo it. I don't practice envelope budgeting myself, but i do have separate accounts for savings and spending.

Social Preferences
Nudge yourself to not inflate lifestyle when you get a pay raise. You just got a pay raise, and you feel like you could afford to go luxury just a bit more. Not denying a one-off treat here, but who you are is not determined by the kind of lifestyle you lead. You may now be mingling with people who only dine at posh restaurants because they can afford to, but you don't have to forsake the kopitiam just because now you are part of the clique and have a fatter pay check. My expenses has hardly increased since the day i started working. What changed was that my savings rate increased.

Self-Control
This is a tough one. Yet, it says self. Nudge yourself to say no to just one bad temptation or bad choice for a start. Don't pay for that self-control. Exercise what is within you for self-control. It takes a lot of willpower and if you believe that willpower is finite, it's good that you also know that it can be strengthened. I don't believe willpower is finite but going with that train of thought, cut desserts on weekdays and only allow yourself to have a cake on weekends might be a way to strengthen self-control. You don't have to cut it out completely unless you are hugely motivated to lose extra weight.

There you go. Start nudging yourself to make slightly better decisions than you did yesterday. Now, i am off to nudge myself to pen down more of my thoughts on this blog.