When Nudges Don't Nudge

The idea of the nudge, as popularized by Richard H. Thaler, is an intriguing and exciting one for financial planners. It offers us a method to help our clients make good, but sometimes challenging, financial decisions they might not otherwise make. It gives financial planners a powerful tool in shaping behavior.

But what if nudges aren't universally applicable. What if sometimes a nudge doesn't do the trick? What if our reliance on nudges causes us to miss other opportunities to help our clients? What if sometimes a nudge doesn't nudge at all?

The Failed Nudge

A recent small-scale study illustrated that sometimes a nudge, in this case an opt-out default nudge, doesn't have any major impact. This study, A Nudge Isn't Always Enough, reviews a group of low-income tax filer’s likelihood of directing a portion of their tax refunds into savings bonds.

The first group was given paperwork with the option to direct some of their refund into a savings bond program. It took a proactive election for this group to save money. The second group, the nudged group, was given paperwork that included a default option sending a portion of their refund to a savings bond. No extra work was required on their part and they actually had to elect out of saving money. Research on nudges and defaults suggests that there should have been some increased frequency or amount of savings in the nudged group compared to the first group.

The result...no difference in participation rates in the savings bond program. The group without the nudge and the group with the nudge participated in the savings bond program about 9% of the time. And the amount saved was no different between the two groups. The nudge had no impact.

We Do Still Choose

The study offers some thoughts about why this nudge failed. These include that the tax filers already had plans to spend their refunds and didn't want to change those plans. A second theory was that, because the savings bonds were locked in for one year based on this one-time decision, participants were hesitant to act. A third suggested financial circumstances were involved.

I suspect that given the financial demographics of this group (low-income), the reality was many had already spent the refund they anticipated receiving. This was a group unlikely to have much discretionary income, that was relying on a tax refund to cover certain, necessary expenses...rent, groceries, etc…. For this group, had the nudge worked on a massive scale, it may have actually put people in a worse financial position. Those nudged into saving may have had to cover expenses already incurred with even less ideal resources, credit cards or pay-day loans or some other means.

Nudge, Nudge, Wink, Wink

Nudges can be tremendous choice architecture devices that can be employed by financial planners and policymakers to shape behavior. But it must be understood that nudges don't work in all circumstances, and that sometimes a good nudge could actually result in a bad decision.

So, nudge away, but know that it doesn’t always have the intended outcome.