a nudge
To be sure, he just coined the term “I’m flipping out”. But here is a description:
Reverse harassment is a threshold, cut, or similar policy by a government agency, educational institution, employer, or similar agency that has an unintended effect on people’s behavior. for behavior that is inappropriate in their own circumstances.
It’s a bit of a mouthful and a bit of a let down. But let’s start with an explanation of the “normal”, a concept from Economic Management, popularized by Richard Thaler and Cass Sunstein in their book of the same name and defined as follows (every Wikipedia):
“A distortion, as we will use the term, is any aspect of a choice system that changes people’s behavior in a predictable way without forbidding choice or significantly altering economic incentives. To count as harassment, the intervention must be easy and easy to avoid. Nudges are not mandates. Placing the fruit at eye level counts as pushing. Banning junk food is not. “
The “classic” is the use of autoenrollment and auto-escalation in retirement plans; “Autoenrollment” means that when an employee is first hired at a new company, they are automatically enrolled in the company’s 401(k) plan at a simple contribution rate and portfolio- n of investment according to their age, but they are informed that they can choose at any time and there will be no participation if they choose in a hurry. An “automatic increase” means that the contribution percentage increases each year, usually by one percentage point, until it reaches a higher level such as 10%. Again, there are no restrictions and employees can reduce their contributions but this increase occurs at the same time as the increase is given so that they do not “feel” the cost of increasing the contribution. Both of these automated mechanisms are designed to overcome the inertia that otherwise hinders retirement savings, compared to people needing to fill out forms or start an account online.
So far, so good. Autoenrollment and rollovers have become popular and are mandatory for new retirement savings plans under the new Secure 2.0 law.
But pushing can have unintended consequences. I mentioned in my previous article about RMD age limits that can be a “motivation” leading retirees to believe that they should avoid spending their savings, even though it would be more financially prudent to do so. this, mainly to delay social security. benefits. The actual amount of annual RMDs can certainly act as a trigger as well, causing some to be more conservative and others more aggressive in their spending than they should be. their own financial situation.
Even with regard to automatic enrollment, although it is true that researchers have shown that the introduction of automatic enrollment increases the rate of savings when a company makes the change, at the same time , we know that there are other savers who can be considered to have saved more than the default number. But as far as I know, it’s hard to quantify, and we don’t know how much stock is “lost” from the reverse effect even if the nudge-based stock growth is greater.
Of course, there are other “distortions” as well, if you extend the idea to thresholds, interruptions and design characteristics that were never intended. When a buyer pre-qualifies, the lender will calculate the maximum loan amount. How many people are caught spending more on their home than they should be, even though in their own circumstances, it would be more financially prudent to borrow less. ?
Or consider something as simple as the university entrance requirements, for example in the Illinois flag, the University of Illinois at Urbana-Champaign (since I’m writing from Illinois). Although four years each of mathematics, social science, laboratory science, and foreign language are offered, the actual requirements lower: 3 or 3.5 years (in the intended major) in mathematics, and only 2 years in social sciences, laboratory sciences and foreign languages. How many undergraduate students who would have taken each of these courses each year, actually consider the entry requirements and fall back on taking less?
Having said all of this, when we as individuals are involved in financial planning or other decision making, it is important to know if nudging or manipulation is part of the picture. , and be careful to consider our own circumstances. Talk to a financial planner or use a good planning template, and look at your own budget instead of a simple rule that may not apply to you. This may seem obvious, and astute financial readers already know how to be careful with various trading schemes, but the downside is harder to spot because they come from “official” sources and have the intention of making well, for the part of the population that spends a lot of money or doesn’t save without them.
