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Behavioral Economics - What it is, and why you should careJosh BNovember 19, 2012
We’ve all heard that famous adage from Thomas Jefferson – “Never put off tomorrow what you can do today.” Easier said than done, sure. But there’s really no arguing that the guy knows what he’s talking about. It’s human nature to put off difficult or bothersome things until you literally can’t put them off anymore. Financial decisions are often right at the top of that list.
Saving money is a perfect example. It’s easy to think of saving money next week, but when it comes to saving money RIGHT NOW? Not as easy. Our natural tendency is to spend it. Economist Shlomo Benartzi says this is one of the biggest obstacles to saving enough for retirement. It’s literally a behavioral obstacle that prevents us from doing what we know we should. We put it off until tomorrow…over and over again.
So the question is, how do you turn that behavioral obstacle into a behavioral solution? That’s the basis of behavioral economics; a combination of psychology and economics that seeks to understand the money mistakes that people make, and how to turn those mistakes into solutions that lead to better financial outcomes for people. Mr. Benartzi lays out some of the basics in the informative and entertaining TED talk below. It’s well worth the 18 minutes it’ll take you to watch it.
What do you think about behavioral economics and the idea of using it to help people save for retirement? Would you be in favor of automatic enrollment in a 401(k) plan where you work? What about automatic increases in the amount you contribute from each paycheck? Leave a comment and let us know what you think.