Tips | July 6, 2012

Five tips to nudge you towards better savings habits

“Nudges” aim to steer people towards certain decisions by presenting the choices a certain way.

Nudges – or “choice architectures” are being used much more widely around the globe. A well-known example is displaying an expensive item in a highly visible spot on a restaurant menu, making the other meals on the list appear cheap by comparison. Authors of the influential book Nudge Richard Thaler and Cass Sunstein have advised government officials in several countries, but individuals may also be able to nudge themselves into better saving and investing habits.

Nudge by … thinking negative Think of credit card balances as “negative” rather than “positive” to curb overspending and keep balances under control. The Nudge blog gives the example of a card with a $10,000 limit and $8,500 spent. It suggests that framing the credit card bill as a debt of -$8,500 (rather than the opportunity to spend another $1,500) “makes you feel that you should move up to zero, rather than trying to stay below $10,000”.

Nudge by … comparing others like you A simple nudge boosted tax repayment rates by about 15 percentage points, according to the UK government’s behavioural insights team. In the trial, letters were sent explaining most people in the local area had paid their tax already – tapping into the power of peer pressure. Similar techniques are used elsewhere, with research analysed by Psychology Today  finding more hotel guests reused towels when told others were.

Nudge by … imposing penalties Incentives and penalties can boost motivation to reach goals – but, like it or not, the nastier alternative of penalties are widely considered to be more effective. An example is Gym-Pact, a behavioural economics gym plan in the United States that organisers say saw a rise in gym going for users who get penalised if they don’t turn up. The same theory can be applied to financial and other goals. The eZonomics Ask Ian blogpost explains that plastic bag taxes work in the same way.

Nudge by… email reminders When workers in an experiment got an email reminding them their employer matched workplace retirement contributions, contributions rose. Contributions went up even more when the email gave a dollar figure showing how much they could gain. Set email reminders to replicate the technique.

Nudge by … making future promises The “Save More Tomorrow” idea by UCLA professor Shlomo Benartzi proposes workers commit to increasing pension fund contributions in the future. A simple way is to foregoing all or part of future wage increases by channelling them into retirement funds. Under the scheme, workers do not make sacrifices on their current lifestyle – they simply forgo “upgrades” to lifestyle that eat up pay rises.

eZonomics team
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