Richard Thaler won the Nobel Prize in economics . . . Here’s why it matters to you and your members

I know many of you anxiously awaited to see which of your favorite economists won this year’s Nobel Prize.   Would it be Hall? Jensen?  Romer? How about Posner for his gripping analysis of law and economics?

Nope, it went to Richard Thaler, who comes from the relatively new field of behavioral economics (B.E.).  B.E. focuses on explaining why the rational models of classic economics so often fail to predict what happens in real life.  It dives deeply into the often subtle and seemingly irrelevant factors that influence how humans actually analyze choices and make decisions.  

Thaler’s work shows how shifting these subtle factors still allow for consumer choice, but levels the playing field between different types of choices. For example, he used this insight to create SMarT, a plan to help consumers save more for retirement.  The process was simple:

Consumers committed to a savings plan that had no immediate impact on their finances.  The plan had two simple steps:

  1. Consumers agreed to save a small percentage of their next pay increase
  2. Consumers agreed to save an increasing percentage of future increases until a maximum percentage level was reached

While participants retained the right to opt out of the program at any time, few did.  The results were amazing. Participants ended up saving 13.5% of their raises and their savings balances far outdistanced those who took a more traditional approach.

This program leveraged key behavioral economic insights to provide consumers with a different context in which to save. Those simple steps, Thaler calls them nudges, allowed the consumer to achieve a higher savings rate by not giving up anything from his/her lifestyle, except a commitment to increase that lifestyle by less than the amount of each raise in the future, and ultimately benefited them in the future.  Would your members benefit from a similar approach?

B.E. shows us the hidden power of defaults, social norms, anchoring, friction and a host of other factors that credit unions can use to nudge their members to better financial wellness.  Richard Thaler has provided us with the raw material. Credit Unions need to put them to use to craft tools that will help their members save more and spend less.

Rick Leander

Rick Leander

Rick Leander is Founder and Managing Partner of LFB Holdings, a behavioral insights consultancy that works with established and startup enterprises. At LFB Holdings we teach clients how to leverage ... Web: Details