Because humans are prone to make gut or rash decisions based on irrational factors such as temptation, peer pressure, or fears, we tend to make decisions that are not in our best interest in the long run.
We know that eating a quart of Haagen-Dazs ice cream a day is not good for our long-term health, but we can’t resist the temptation because it tastes so good. The same can be said about cigarettes, alcohol, gambling, or any other vice humans can dream of.
There is not one area of our lives where rash decision-making doesn’t negatively impact our long-term well-being – whether it be finances, relationships, or physical and emotional health.
In the world of relationships, how many of us know somebody who married an awful person for money or looks but who went on to suffer emotionally long-term? In finances, many Americans realize they need substantial savings to weather retirement. Yet, they continually rack up debt that will put them in the hole come retirement time.
The basis of the book Nudge by Richard H. Thaler & Cass R. Sunstein delves into why humans make bad decisions and how with minor adjustments, alterations (i.e., nudges), we can avoid bad decision-making and achieve success. Companies and institutions have been using nudges for ages to influence our decision-making – usually against our best interest. Supermarkets make a killing by putting sugary treats at eye level at the check-out stands.
In the book Nudge, the authors suggest using nudges in our favor to turn the tables against bad decision-making by reprogramming our decision-making process to add nudges – little adjustments – to ensure we make the right choices.
The authors spend quite a bit of time discussing one particular type of nudges – defaults – that are highly effective for influencing good decision-making. You probably didn’t know this, but the technology we use every day uses default nudges to prevent bad decision-making. How often have we been reminded by an email we were sending that we forgot to include an attachment even though we referenced one in the email? If this was an important business attachment, that one simple “default” probably saved you a lot of headaches and time.
Many of us already incorporate default nudges into our daily lives to avoid bad decisions; we may just not know it.
For example, how many of us default to our spouses or partners before making significant buying decisions? That default probably saves us a lot of relationship headaches in the long run. It gives the added benefit of a second opinion that may prevent an unwise purchase, not in our best long-term economic interest.
If you look around, nowhere is bad decision-making more on display than in the world of investments. Wall Street knows this.
They understand that the run-of-the-mill investor is prone to rash decision-making and decisions based on irrational influences such as the fear of missing out or shiny object syndrome.
It’s in Wall Street’s best interest to encourage high trading volume, but this is how bubbles happen and how savings are wiped out.
How can you use nudges to guide more wise investment decisions and avoid the madness of Wall Street? One way is to give yourself more options or make it harder for yourself to choose the bad ones.
In my Haagen-Dazs example, examples of nudges you could use to prevent over-indulging in ice cream are not buying it to eliminate the temptation or giving yourself healthy, delicious alternatives in case the urge arises.
With investing, if you’re prone to making rash stock and crypto trade decisions that have done nothing for your portfolio, eliminate the apps like Robinhood that enable rushed decisions or give yourself other investment options that are insulated from widespread rash decision making.
Another nudge you may consider is to think long-term before making any decisions. Ask yourself how a particular investment action will influence your long-term financial goals. Yet another nudge would be to seek outside advice. Hook yourself up with a seasoned investor or give yourself a lifeline to a trusted confidant who you can confide in with the investment choices you’re facing and obtain their advice before diving into a particular investment pool.
Bad decision making and the inability to see the long-term consequences of our actions is why many of us who write down New Year’s resolutions never achieve them when we sit down to assess our success or lack thereof at year’s end.
The successful ones have figured out how to keep themselves on task and how to avoid bad decisions. They have programmed nudges into their decision-making that gives them the best chances for success.
If you aren’t where you want to be financially, think about reprogramming your processes to achieve success. With simple adjustments – nudges – this is possible.