The Nobel Prize for Economics was awarded in 2017 to Professor Richard Thaler. He was honored for his contribution to understanding how people really behave when they make choices. In contrast to the ‘homo economicus’ model that assumes people always act rationally, Thaler shows that, in fact, why people choose things in the way they do is often irrational but, crucially, can be predicted.
So, what has all this got to do with pensions? Well, it turns out that applying some of Richard Thaler’s ideas can achieve outcomes far more effectively than simply telling people to do something. Many people are not saving enough for their retirement. That’s clear. But rather than giving them ‘the facts’ and leaving them to make the right decision and save more, using subtle ‘nudges’ can help shape behavior in often unexpected ways.
For example, the UK’s tax authority, HMRC, found that when it came to collecting taxes, payers responded much better to a letter containing the information that 9 out of 10 taxpayers in their local area pay their tax on time. In fact, there was a 15 percent increase in on-time payments compared to those who simply received a standard tax demand. This ‘social pressure’ nudge pressed some unconscious buttons.
Other ‘steering nudges’ frame choices in terms of the benefits that a person will receive. And the larger the potential gain, the more likely that people are to take notice. So, for example, alerting pension members to the fact that the more and the earlier they start to save will increase their chances of having enough in retirement is likely to be much more effective that simply exhorting them to save. A steering nudge makes the desired action tangible and relatable.
Another form of nudge, ‘ownership’, appeals to people’s desire to be in control. For example, giving members a chance to customize how they manage their retirement savings with an app for example, gives them a sense of taking charge. Along the same lines, ‘information’ nudges help people feel knowledgeable and confident. So, providing online support for enrolment in a retirement savings plan can help people to help themselves and take ownership of the choices that they are making.
One of perhaps the most relevant insights from Richard Thaler’s work is people’s tendency to inertia. Even though people may benefit from a something (eg a retirement savings plan) inertia stops them from taking advantage. But make participation the default option and relatively few people will opt out, thanks again to inertia.
For anyone with children, nudge theory is already part of their ‘management’ toolkit. Who, after all, hasn’t at one point used steering, informing, empowering or social pressure nudges to get their kids to brush their teeth, do their chores, complete their homework or any number of unpopular prospects?
By applying the same thinking, pension agencies can start to shape behavior with subtle changes. And those small actions and shifts in emphasis can have a disproportionately powerful impact. Please get in touch if you’d like to discuss how ‘nudges’ could help influence your members’ behavior.
For more information, visit www.accenture.com/pensions
See this post on LinkedIn: Nudge Me!