(How we are tricked into doing the right thing by behavioral science)

When I want my children to have a healthy snack, I slice an apple nicely on a plate and put it in front of them.  They gobble it up happily.  But if I merely put out a bowl of fruit, or tell them to have some fruit, they do nothing.

Increasingly, banks, companies and even the government are using similar tactics to get you to make better financial decisions.  You may not even realize it, but the world of business and finance is becoming masterful at nudging you to take action.

The way they are doing it is through what’s called behavioral economics.  At the root of this relatively new science is an understanding that humans are, well, human—not the unemotional decision-makers represented in economic textbooks.

On the contrary—we often choose immediate rewards over higher future benefits.  We take the path of least resistance, typically by going with the status quo or simply doing nothing.

SEDUCED TO ACT.  Take saving for retirement.  We all know it’s important, yet studies show that many of us haven’t done a good job of it.  Enter behavioral economics.  One of its most successful applications has been to get workers to participate in retirement savings plans.  For decades, employers cajoled workers—even offering generous matching contributions—to sign up for the 401(k).  But human inertia often won out, and many workers didn’t join.

Then employers—with a green light from Uncle Sam—started to automatically enroll workers in the plan; some even gradually increased employees’ contributions over time.  Workers can opt out, of course.

But inertia, now working in favor of savings, stops them from doing so.  Vanguard, an investment firm that administers 401(k) for employers, found that when companies auto-enroll workers, the participation rates among new hires more than double, to about 90 percent.

The good news is that a growing number of employers, companies and nonprofits are using behavioral insights in similar ways to influence choices to make people better off.    Here are (6) examples:

  • Making Investment Decisions Easier.  Too many 401(k) investment choices can overwhelm, causing workers to put off making any decision.   And even when they do select investments, human inertia often causes them never to revisit their choices.  Over time, their portfolios can end up being heavily weighted in riskier stocks, putting their nest egg in jeopardy.

The solution:  target-date retirement funds.  Workers need to select only a single fund with the date closest to their retirement, and a professional money manager does the rest—investing aggressively when workers are younger and gradually becoming more conservative as they near retirement.  Target-date funds are usually the default option when employers automatically enroll workers in 401(k)s and now are found in 9 out of 10 workplace plans, according to Aon Hewitt, a benefit consulting firm.


  • Making Savings More Fun.  People have a natural optimism and are more likely to engage in activities they enjoy.  Now banks and credit unions in several states are adding excitement for savers by entering them in raffles with cash prizes.  Retail giant Walmart is among the latest to employ this nudge.  Every $1 that customers sock away in Walmart’s prepaid-card savings program entitles them to one entry in a monthly sweepstakes with 500 cash awards, including a $1,000 grand prize.    Since the program’s launch in August, Walmart says participants’ savings have increased by 35 percent.

  • Overcoming Short-Term Thinking.  Our best intentions to save for retirement are easily derailed by our desire for cash right now.  To overcome this, many employers have adopted a “save more tomorrow” program that asks employees to make a commitment.  Workers agree that whenever they get a raise, a portion of it will automatically go toward boosting their contributions to the company retirement plan.   Their take-home pay still grows, and they don’t have to cut spending—so increasing the amount they save becomes automatic and painless.


  • Managing Cash Smarter.  Many sites and apps designed to help us save or invest push a variety of behavioral buttons.  For example, Digit is an app that monitors your spending and moves money from your checking account into savings when you can afford it.  By getting you to commit to saving upfront and automating the process, you’re more likely to build up your savings without having to make individual decisions to set aside the money.  Digit claims that since its launch in 2015, it has helped its users stash away $350 million.  An online budgeting service and app called Mint takes information from your credit and bank accounts to track your spending and sends you an alert when you’re going over budget.  We tend to view personalized information as more accurate and are more likely to act on it.


  • Sparking a Sense of Healthy Competition.  We want to be as good as everybody else, and tools that let us compare our finances with others’—and find out where we are falling behind—can get us to act.  For example, the financial site Credit Karma allows you to compare details about your credit with that of others of similar age and income in your state.  If you don’t measure up, you can take steps to improve.


  • Focusing Our Attention.  One of the oldest budgeting tricks is to set aside money in different envelopes—each labeled with a specific goal such as a vacation or new car.  This sets concrete goals and reinforces self-discipline.  Many banks and credit unions now allow customers to do the same thing by setting up subaccounts with different names.







Behavioral economics can be used against you, too—by businesses trying to make a sale or scammers trying to steal.  Watch out for these efforts to manipulate you:


  1.  Three months, half off!  Your intent often is to cancel before the price goes up.  But it ends up being years.  Mark your calendar with the date you will cancel the service.


  1.  Limited time only!  The pitch man urges you to order in the next 30 minutes and receive an amazing deal.  Strip away the emotion or excitement of the deal, and ask yourself if you really want the product.


  1.  Watch the box.  A prechecked box on an order form may sign you up for an additional costly service unless you uncheck it.  Similar hidden check boxes may have you agree to automatic renewal of services.


  1.  Get your refund now!  People are often encouraged to take their tax refund estimate in cash rather than wait for a check from the IRS.  These services can come with fees and processing costs, or have strings attached.  If you can afford to, resist the urge and get your refund a bit later.



(Written by Gary Koenig for AARP Bulletin, May 2017)