We’re human after all

“I will try to spend it as irrationally as possible”
- Economist Richard Thaler said when asked how he would spend his Nobel Prize money

When the image of a black housefly was etched onto the side of a urinal bowl, spillage declined by 85% at Schiphol Airport in Amsterdam. It turns out, men can’t help but aim when given a target. In Spain, all citizens are automatically registered for organ donation unless they choose specifically to opt out. As a result, Spain is a leader in organ donation.

What does a fly in a urinal and organ donation forms have in common? They are both examples of being ‘nudged’, or subtle policy shifts to steer people to come to decisions that are in their self-interest. The nudging theory was pioneered by Professor Richard Thaler, who won a Nobel Prize in Economics for his work in behavioural economics.

Much of what we learn in Economics 101 is based on the premise that human beings are rational, but what if we’re not? Professor Thaler believes that in the real world, people are irrational but in a predictable way. Just as you are unlikely to keep your New Year’s resolutions, you are also unlikely to save enough for retirement. His work led to the theory that you can use subtle nudges to encourage people to make better decisions.

Professor Thaler’s work has had widespread implications in government policy making, especially in the field of pension money. The UK government mandated employers to establish an ‘automatic enrolment’ scheme in 2012 (much like CPF) in order to increase worryingly low pension savings rates. Employees would automatically be placed into their employer’s scheme and contributions would be deducted from their salary unless they specifically opted out. As a result, active membership of private sector pension schemes jumped from 2.7 million in 2012 to 7.7 million in 2016.

Professor Thaler believes that saving can be much more efficient and simple — more choices often does not result in better choices. We agree. Instead of burdening savers with choosing between hundreds of funds, and an infinite number of portfolio possibilities, why not utilise top financial and academic research to pre-set portfolios that are customised to a saver’s needs and risk tolerance? Seems to make sense; perhaps too much sense…we are human after all.

Originally published Oct 13, 2017 on endowus.com