What the 2017 Nobel Prize in Economics Can Teach Us About Our Habits
We think we are the best thing since the last iPhone unveiling.
It’s understandable. Evolution led us to this belief so that we could procreate and survive. Social media has unquestionably made it an even bigger “ME show” these days.
Humans live with limited rationality. This is one of the lessons that 2017 Nobel Memorial Prize in Economic Sciences winner, Richard Thaler, exposed to help push forward the field of behavioral economics.
(If you are a lover of the podcast Freakonomics, or one of their books, these findings are right up your alley.)
Here are two of his major findings that can help us understand our actions, decisions, and habits:
People don’t, as it turns out, think about their total lifetime welfare when it comes to making financial decisions. They focus on the performance of individual decisions and are less concerned with savings if they are a small percentage of what’s being spent.
In economics, this is important to explain how each of us views our savings and retirement. We live a lot longer these days, but if left to our own choices, we are horrible at long term financial planning.
This can also be seen in our growing obesity and overweight issues. We aim to enjoy the food in the moment, rather than eating for a longer and healthier life.
Thaler proposed that it’s necessary to view each individual as two people: one side of you that plans, and the other that does (or doesn’t do) what is planned. The planner side of you signs up for the yearly gym membership, expects you to go every day, and get ripped beyond measure. The doer side of you might hit the snooze button and feel good about it, or decide to go to brunch with the crew than grab the barbell.
This is how gyms and many other services make their money, by appealing to the planner side of you. We must become aware of this and be intentional when making our plans so that we can actually follow through.
These findings played an important role in the development of nudge theory, another concept developed by Thaler. Nudging happens when small stimuli are provided to influence people’s behavior.
Nudging is used by big companies to influence our actions, as well as individuals looking to guide us to their intended outcomes.
These stimuli can be as simple as a company offering a “free-version” of their service, or a salesman inflating the price of a product and then telling you that they’ll give you a personal discount.
It’s important that we become aware of these stimuli, so that we can be aware of our decision making and choose avenues that actually serve us.
So, what can we do with these ideas?
- Honor the future you by cooperating with the planner in you. You make plans for the best possible outcome, so trust your gut and follow through.
- See and understand the stimuli that are meant to guide your actions. Choose your future with those in mind.
- Implement stimuli in your life that nudges you to the future you envision.