I admit I’m an economics geek. What I find so interesting is understanding human behavior. Like when the local grocery store sells strawberries for $2/pint and there is some interest. But when the price is shown as $4/pint but half off, sales go up. Even though the price didn’t change, the perception is that these strawberries are now a great deal. Everyone likes a deal. The field of economics got its formal start back in the 1700’s when Adam Smith wrote about how the market works when everyone is trying to get the best deals (looking out for their own self-interest). In general, this theory makes sense. Who doesn’t want to be paid the best salary for the work they do and spend the least amount of money to buy the things they need?
After Smith, economists spent a lot of time working on problems like, what happens when the price of a product increases? In general, fewer people buy the product if the price goes up. Why pay more for the same thing? But, (and there’s always a “but”) if there’s a popular logo on it, maybe the demand increases. Or if a celebrity starts showing up with this product and people decide it’s now a great thing to have even if it’s more expensive, sales increase.
Wait, this isn’t logical. A guy named Robert Thaler just got the Nobel Prize in Economics because of his work to introduce the irrational human being (i.e., us) into economic thought. Adam Smith was right, but there are a lot of factors, distractions, and barriers involved when we’re looking after our own best interests. These distractions sometimes keep us from making good decisions.
For instance, we would all have a much better retirement if we started saving when we got our first job. Some people do this, but many don’t. Why not? It turns out that filling out forms and making decisions about strange financial products isn’t easy. So, some people just don’t get around to it. Thaler proposed acknowledging our human nature in making economic decisions and switching the process for retirement savings. Instead of asking people to sign up to start retirement savings, why not just automatically sign them up and allow them to opt-out if they want to. It’s no surprise that more people participate in retirement savings when companies set up their plans this way. By one estimate, the implementation of Thaler’s theory of auto-enrollment and auto-escalation in retirement accounts has increased retirement savings in the United States by almost $30 billion.1 Now that is pretty cool.
So how do we make sure we make the best financial decisions, knowing that we’re irrational beings? I always like the “Take It Slow” approach. If I have a big financial decision to make, I try to think it over away from the sales location (i.e., the car dealership, or the home I’m interested in buying, etc.) I also seek advice from others. Often, a third party can help me see things I’m missing or can put things in perspective. And I love doing this for others. There are some easy things we can all do to prepare for the future or make better decisions today but they aren’t always obvious. Seeking advice when it comes to big decisions or long-term plans of any kind can help all of us find better outcomes.
Kristin Rodriguez
Citations.
1 Malito, Alessandra. “Nobel Prize winner Richard Thaler may have added $29.6 billion to retirement accounts.” MarketWatch, 10 Oct. 2017, www.marketwatch.com/story/nobel-prize-winner-richard-thaler-may-have-added-296-billion-to-retirement-accounts-2017-10-09?siteid=yhoof2&yptr=yahoo.