The Time for Nudges

One of the most common examples for why nudges should be used by governments, employers, parents, and grandparents is the example of using nudges to encourage financial savings, especially for retirement. People don’t save enough for retirement, and are often quick to spend their money before they even have it, leaving themselves financially vulnerable to job losses, car breakdowns, and severe weather events. Governments can offer tax breaks for savings, employers can default employees into retirement savings accounts at high levels, parents can teach children to save allowances, and grandparents can start long-term savings vehicles for young children and nudge them to use the money wisely at a reasonable age. What the retirement nudge examples all show, is the importance of thinking about time when considering nudges and behaviors.

 

In their book Nudge, Cass Sunstein and Richard Thaler write, “Self-control issues are most likely to arise when choices and their consequences are separated in time.” Nudges, the authors explain, are incredibly valuable when time is an important factor. When our behaviors and actions provide small immediate rewards at the cost of larger later returns, then nudges can play a huge role.

 

Teaching children self-control, and encouraging them to show restraint and save their weekly allowance for a larger purchase that will last longer than some gum or candy does the same thing as helping employees contribute more than 5% of their paycheck to a retirement account. In the present moment it would be nice to have a dopamine hit from a candy bar, but a new Gameboy game is going to provide hours of entertainment after the candy bar is gone. Similarly, a lease on a new sports car might be affordable, but an earlier retirement, sending a kid to college without saddling them with debt, and surviving a costly MRI during an unemployment spell in an economic downturn is much more important than impressing the neighbors.

 

Self-control is easier when there is a short time period between our action the consequences we will face. If I know that yelling at someone on the phone while I’m in the presence of my boss could cost me my job, I’ll probably be able to hold back. But many of our self-control requirements have much longer time spans for the benefits or costs to become apparent. While it doesn’t feel like we lose anything by scrolling through Twitter for a few minutes after lunch each day, those minutes add up, and could be the difference between a promotion a year from now and missing out on a big break for career advancement.

 

Nudges are helpful because they can help us better understand costs, use better discount rates for the future, and make the difficult decisions that payoff in the long run.  This is why the retirement examples are so common when discussing nudges, because they are the precise examples of where our brains make cognitive errors that could harm us in the future, and they are spaces where small actions can help us overcome poor decision-making, impulsive behaviors, and short-term thinking to behave in ways we would chose if we were acting more rationally.

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