Nudge: Improving Decisions About Health, Wealth, and Happiness

“Saving for retirement is something that Humans find difficult. They have to solve a complicated mathematical problem to know how much to save, and then they have to exert a lot of willpower for a long time to execute this plan.”

Statistics show that the average American household spends more than they earn and borrows more than they save. Most Americans have enormous credit card debt, little savings, and heavily rely on social security. However, America’s social security system is facing a looming crisis. Though they never say it, politicians know that the social security system is insolvent, and the only options are to increase taxes or cut social security benefits. Therefore, the most viable solution is for Americans to save more money on their own.

Despite the government passing laws to create tax-favored savings programs such as IRAs and 401(k)s, many Americans aren’t taking full advantage of them. This is often because of flawed assumptions. 

The first is that the average person can calculate how much they need to earn and save in their lifetime to enjoy a comfortable retirement. The truth is that even trained economists struggle to calculate the savings required to live comfortably after retirement. The second assumption is that people have enough willpower to maintain their savings plan. The reality is that most people are easily tempted to spend their savings on things they don’t truly need.

Coincidentally, studies show that most employees know that they should save more. This means that they are open to strategies to help them achieve their financial goals. It is naïve for the government to assume that humans will automatically make the best decisions when provided with various financial programs. The truth is that people need nudges that can steer them to make better choices and save more money for tomorrow.

“Forming and managing an investment portfolio over a long period of years is difficult. But individual participants typically undertake this task on their own…The end result is similar to what might be expected if most of us tried to cut our own hair—a mess.”

One of the things you have to consider as an investor is the risk level of your investments. For higher returns, you should invest more in high-risk assets like stocks. This will allow you to accumulate more money in a short time. 

However, if you want to minimize the risk of losing your investment, you can invest in safe assets such as bonds or the money market. Keep in mind that safe assets earn lower returns, so it's best to invest more money or invest for longer. Knowing how to balance stocks and bonds in your portfolio is critical, especially for those seeking a comfortable retirement.

When choosing where to allocate assets, many investors tend to make a lot of mistakes. For example, most of them have retirement accounts invested in mutual funds. Some even don’t know the ratio of stocks to bonds their fund uses. Then there are stock investors who try to time the market but buy when they should be selling or vice versa. Others also split their portfolios evenly between stocks and bonds without realizing that they can make more money by leaning more toward stocks.

The bottom line is that the average investor isn’t as financially educated as they think they are. It could be because they lack the experience or are simply overwhelmed by the sheer number of choices available. Thus they pick the default option that their investment manager offers because it’s the most convenient. Investment firms can do more to help their investors make the best decisions for their future savings and retirement.

“One might wonder why lenders are so eager to get the student loan business that they are willing to engage in practices that are at least sleazy and possibly illegal. The answer is that the combination of loan guarantee and subsidy by the government makes these loans exceptionally profitable.”

With rising college tuition costs, most students are forced to apply for scholarships or get part-time jobs. But, this is not enough to cover college fees, so they often turn to loans to cover the deficit. 

There are two kinds of loans—private (from financial institutions) and Stafford loans backed by the federal government. With a Stafford loan, the government pays the interest on the loan while the student is studying, guarantees payment to the lender in case the student defaults, and subsidizes the loan. Lending institutions make huge profits from these loans, but students often face challenges when looking for the best loan option available.

Though federal loans are cheaper, it is, however, more tedious and time-consuming as it requires a student to fill out an application form with more than 100 questions. Once the form has been filled, the Department of Education determines the amount the student’s family is expected to pay. Finally, the college then determines the loan amount the student gets. A student usually goes through this tiresome process without knowing whether they’ll get enough money to pay for tuition.

Opting for a private loan may seem like a more convenient route. However, there are many pitfalls a student should watch out for. Most private lenders bombard students with easy and quick loan offers, but most information is misleading. Some college financial aid officers take bribes to push students to sign up with specific lending institutions, even when they provide loans that aren’t in the student's best interest. Furthermore, since private lenders offer you as much money as you want, students often succumb to borrowing and overspending.

When the government privatized college loans decades ago, the goal was to increase market competition so that students would have a wider range of options. However, lenders engage in predatory practices and often provide students with confusing or self-serving “expert” advice. It would be more helpful to provide students and their families with clearer information so that they can choose the best loan possible.

“The primary sources of organs are patients who have been declared “brain dead.” In the United States, roughly twelve thousand to fifteen thousand potential donors are in this category each year, but fewer than half become donors.”

Of the more than 100,000 Americans who are on waiting lists for organs, as many as 60% will die due to a lack of organ donations. The problem isn’t a lack of willing donors. A study showed that as many as 97% of people are willing to donate their organs and those of their children if they pass away. Unfortunately, most people willing to donate their organs never register as organ donors. Thus, surviving family members refuse to permit their loved one’s organs to be harvested when they pass away. Therefore, the biggest deterrence to raising organ donation rates is an individual's process to register as a donor.

This is an area where following the default rule (not bothering to register as a donor) can significantly impact the lives of patients who desperately need a transplant. Some have argued that the government needs to take a more aggressive approach involving the routine removal of dead people's body parts without asking for permission. 

In some states in America, the medical examiner can remove the deceased’s corneas without anyone’s permission. The corneas can then be transplanted to a blind patient. In Georgia, this law increased corneal transplants from 25 in 1978 to more than 1000 in 1984.

However, it would be difficult to use this kind of law for other body parts, such as kidneys, as most people would find this very offensive. The government should find other less extreme alternatives that encourage people to register as donors. Appropriate nudges can move people away from the default rule and more toward giving explicit consent to become willing organ donors or not.

“If your use of energy produces air pollution, you are unlikely to know or appreciate that fact. Those who turn up the air conditioning and leave it on for a few weeks are unlikely to think, moment-by-moment or even day-by-day, about all of the personal and social costs.”

Many of the steps that world governments have taken to address environmental pollution have had a positive effect. However, some regulatory efforts have been costly and wasteful, and others have even worsened the problem.

In most cases, governments have chosen a command-and-control approach where environmental regulators use strict mandates to limit free choice. For example, the US has imposed a national emissions limitation on all major pollution sources. But such mandates that deny people the right to free choice can be problematic, especially from a libertarian perspective. Sometimes, people refuse to change their behavior despite the government's stringent laws. 

Instead of forcing people to comply with environmental laws, the government can use the right market incentives. In this case, the market includes individual consumers, small and large companies, and even government institutions. There are two major hurdles the market face that contributes to environmental pollution. 

The first is the non-alignment of market incentives. For example, it’s very difficult to convince a dairy farmer that raising additional cows on his farm today will ruin the environment next year. The benefits the farmer receives today far outweigh any immediate environmental costs. Therefore, they don’t have an immediate incentive to take action.  

The second hurdle is a lack of prompt consumer feedback to determine how much energy they are utilizing or wasting. The costs of pollution are hidden, and many consumers simply have no clue how their daily actions negatively affect the environment. By publicly disclosing information about energy usage and pollution by individuals and companies, all citizens can be socially nudged to change their behavior.

“Most Americans seem to believe that children do have a right to a good education; there is a consensus on that point. One reason for that consensus is that educated people are more free. But the consensus breaks down when people explore how, exactly, to achieve that right.”

When the economist Milton Friedman first proposed the idea of school choice, he argued that introducing competition between schools would benefit disadvantaged children the most. By giving poor children vouchers to attend any school they want, they would be able to study in privileged schools and thus close the education gap with wealthier students. 

Having the freedom to choose which school your child can attend is a good thing, and it has indeed led to higher student achievement in public schools. However, having more choices doesn’t mean that parents will automatically pick the best school.

A good example can be found in Worcester, Massachusetts. In the summer of 2003, 4700 students were eligible to transfer from their underperforming school to a better one. However, only one student took advantage of this opportunity. 

One of the main reasons parents didn’t exercise their right to school choice was the tedious transfer process. The school district required parents to first meet with the school principal, then attend another meeting with district officials before finally filing the paperwork. Some parents are even expected to read through a 100-page booklet containing a list of schools and their positive features. However, the booklet somehow leaves out critical information such as attendance rates, test scores, or even physical location.

Faced with so much choice but so little information, many parents, especially from low-income neighborhoods, simply decide to send their children to the default school. But if the local school is underperforming, then the child misses out on the chance to enroll in a better school with higher test scores. This is why it’s important to help parents make better choices when selecting schools instead of just presenting them with more options.