12 Finance Lessons from Nudge by Richard Thaler & Cass Sunstein

Personal finance lessons from one of my favourite books!

1. The Automatic vs Reflective brain systems

This was a lesson on how we think. The brain functions in two ways. One way is automatic (intuitive) and the other is reflective (rational).

2. Economists vs Humans

Economists are people who have studied economics while Humans are those who haven’t. The book refers to economists as homo economicus while we normal humans who aren’t economists as homo sapiens .

What is a nudge?

The dictionary definition of nudge is ‘ to push mildly or poke gently in the ribs, especially with the elbow. ‘ Yes, that thing you do when you’re with your friends to alert them about somebody who’s passing. Then later proceed to gossip about them lol.

Finance lessons I learnt from this book

The book covers a lot of topics such as how to improve organ donations, how to save the planet, privatizing marriage, improving healthcare for the elderly. I’ll focus on finance lessons for this review but I encourage you to grab a copy and read.

1. “The more you ask for, the more you tend to get.”

This is an important lesson for people working in the charity sector. While asking for donations, charities give figures that serve as nudges that influence how much to donate. Charities that are run by experts don’t choose these numbers at random. People will give more if the options presented are $100, $250, $1,000, $5,000 than if options are $50, $75, $100 and $150.

2. “Lotteries are successful partly because of unrealistic optimism.”

Unrealistic optimism leads to risks, especially when it comes to our health. How many times have you thought that other people can be infected by COVID-19 or HIV/AIDS but it can’t happen to you?

3. “Losing something makes you twice as miserable as gaining the same thing makes you happy.”

This produces inertia (or laziness) which makes us stick to our investment holdings, or not making any changes yet the change would bring about gains.

4. Default options are powerful.

This, combined with our laziness keeps us trapped in subscription spending cycles. Those in charge of sales set renewal of subscriptions to automatic because they know we’re too lazy to call, email or text to cancel the subscription.

5. “People tend to be mindless, passive decision-makers.”

Credit card companies take advantage of this fact. Our choices depend on how ideas or problems are presented to us. Otherwise, why would you accept to pay $25 per month knowing very well you spent $500? They have presented the minimum payment as a relief to you while banking 18% in interest from you.

6. “People are more likely to conform when they know that other people will see what they have to say.”

Does social media flexing ring a bell?

7. “People’s investment decisions are often influenced by the investment decisions of their friends and neighbours.”

Isn’t that why we all want to buy land? Hahaha

8. “Self-control issues are most likely to arise when choices and their consequences are separated in time.”

For example, talking to people in their 20s about retirement, more so about starting to save for it early is like talking to a stone. Living in poverty AT 65 seems so far away. They’d rather spend now. Humans always favour today over tomorrow.

9. “Even hard problems become easier with practice. Unfortunately, some of life’s most important decisions do not come with many opportunities to practice.”

You only have one chance to save for your retirement. This is a high stake life decision. Choosing a marriage partner is also a high stake life decision.

10. “Credit cards have complex pricing schemes that are neither transparent nor comprehensible to consumers.”

This is deliberate. I’ll write a separate article on this now that I finally have experience on it.

11. “The costs of saving too little are greater than the costs of saving too much.”

Remember to start now because it’s harder to get a financial do-over when you’re 40.

12. “When in doubt, diversify.”

There’s sensible diversification and naive diversification. “A sensible case of this rule of thumb is what might be called the ‘I/n’ heuristic: when faced with ’n’ options, divide assets evenly across the options. Put the same number of eggs in each basket.”



Your voice of reason before you blow all your money this weekend! www.thewealthtribe.com

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