Steven Merrell, Financial Planning: Nudging like a Nobel Prize winner – Monterey County Herald

On Monday, Richard Thaler was named as the 79th recipient of the Nobel Prize in economics. The Nobel Prize committee’s press release included the following statement: “By exploring the consequences of limited rationality … and lack of self-control, (Richard Thaler) has shown how these human traits … affect individual decisions as well as market outcomes.”

If “limited rationality” or “lack of self-control” sounds like you or someone you love, you might find valuable insight in Thaler’s work.

If you want to get a taste of Thaler’s thinking, I highly recommend his 2008 New York Times bestseller, “Nudge,” which he co-authored with Cass Sunstein. In “Nudge,” Thaler acknowledges that humans are not the rational creatures that classical economists assume us to be. We are notorious for making choices and acting in ways that are not necessarily in our long-term best interest. We eat foods that are unhealthy. We succumb to peer pressure. And we don’t save enough for retirement.

To help counter these mortal foibles, Thaler suggests what he calls a nudge. A nudge is a way to frame a decision so the individual is more likely to choose a desired path. The person who helps to design the nudge is called a “choice architect.” An example will help clarify Thaler’s idea.

The trustees of a company’s 401(k) plan are choice architects. Among other things, they determine the requirements for joining the plan, the investment options in the plan, and how much the company will match participant contributions to the plan. Their decisions significantly influence how many people participate in the plan and how effective it will be in helping participants achieve their retirement goals.

Many 401(k) plans struggle with low employee participation rates. If the trustees of a 401(k) plan want to encourage more participation in the plan, Thaler suggests they adopt a nudge called automatic enrollment. Automatic enrollment means that every eligible employee is automatically enrolled in the plan unless they choose to opt-out. In contrast, most 401(k) plans require eligible employees to opt-in.

Thaler cites research that showed initial participation rates for the old-school opt-in 401(k) plans started at about 20 percent and rose to 65 percent after three years. In contrast, companies that nudged employees with automatic enrollment saw immediate participation rates of 90 percent and participation grew to 98 percent within three years. To me, automatic enrollment seems more like a shove than a nudge, but this example clearly shows the strong impact choice architects can exert on how decisions are made.

As you think about your situation, ask yourself if Thaler’s ideas can help you be more intentional in your financial decisions. You are the ultimate choice architect in your life. Can you design nudges that will help set you up for financial success? What would they look like? How would they work? A conversation with your financial advisor might be helpful. Ask her if she has read Thaler’s Nudge and if she can help you design some nudges into your financial plan.

For more on nudges, check out Thaler’s Nudge blog at The posts are old, but the examples might give you some ideas. You can find more on Thaler’s academic research at his University of Chicago faculty website


Steven C. Merrell is an investment adviser and partner at Monterey Private Wealth, Inc., in Monterey. Send questions concerning investing, taxes, retirement or estate planning to Steve Merrell, 2340 Garden Road Suite 202, Monterey 93940 or

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