The Power of Suggestion

Anyone who has managed people, raised kids, coached a team, led a project, or worked on a school project knows this: we all tend to see things differently through our own filters. And sometimes our view of the world doesn't square with popular culture. Here's a woman who just won an award because her economic research just didn't square with the Chicago School of Economics.

Brigitte Madrian researched how people behave in their company 401(k) plans and noticed that even though the company was giving away money, in the form of a "match," many people did not contribute anything to get the match. It's irrational because they are not acting in their own best interests. It's free money.

Ms. Madrian then studied companies who changed the "default" on the 401(k) so that their employees were automatically enrolled. In order to not participate, you had to check a box. Suddenly, participation rates shot up dramatically! People started acting more rationally? Not likely.

The economists who wear white coats expect that defaults would not affect participation. A rational employee would simply save the right amount of money each month based on how much she valued living well in retirement. In reality, people aren't rational. People are people! We do what's best for ourselves more often when we have a little "nudge" in the right direction.

This "nudge" is a powerful concept to wrap your head around, and we'll talk about it for a few weeks in the Periscope. On the one hand, suggesting that people do the right thing is excellent advice and shows that you care for them, and helps society at large. On the other hand, it seems paternalistic to automatically enroll folks and nudge them to save for their own financial futures.

Read more about Ms. Madrian and how "behavioral finance" is changing a small part of the world we live in.

Emotional Investors and the Fed
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