Richard Thaler, 2017 Nobel Prize in Economics WinnerSubmitted by Maze Financial Planning, LLC on October 27th, 2017
This year's Nobel Prize recipient in the field of Economics is Richard Thaler. His work is what gave scientific explanation to some practical tips for companies. Automatic retirement plan enrollment was his big hit. I've read a couple books about making saving and investing easier one could say, making things automatic is some common wisdom. But science, research and evidence is what separates general knowledge from empirical evidence. Thaler's work is what led countless companies across the United States to make retirement plan enrollment an opt out option rather than an opt in, and because of that many of us now have a good chunk of money saved up. Advisors spend a lot of time talking about risk and return, how to be competitive in the market place, portfolio efficiency and whatnot. Thaler's work is arguably what has led hundred's of millions of people to save in the first place, to have some money to invest with and be better prepared for retirement. It's amazing what a little nudge will do, his work extrapolates on the profoundness of a nudge but here's a short excerpt from his paper, "Heuristics and Biases in Retirement Savings Behavior."
"In one plan Madrian and Shea studied, participation rates under the opt-in approach were barely 20 percent after three months of employment, gradually increasing to 65 percent after 36 months of employment. When automatic enrollment was adopted, enrollment of new employees jumped to 90 percent immediately and increased to more than 98 percent within 36 months."
(Benartzi, Shlomo and Thaler, Richard H., Heuristics and Biases in Retirement Savings Behavior. Journal of Economic Perspectives, Forthcoming. Available at SSRN: https://ssrn.com/abstract=958585)
70% more employees saving for retirement immediately, 33% more employees saving for retirement after 36 months of being employed. That's closing the gap!
I must also say, I most attribute Richard Thaler with his work about biases. In college this is where I found a lot of motivation for scrutinizing investment methodologies, by pointing out mental accounting, nudging and social preferences. To make it simple, we each view the world in our own way and that changes how we interpret something. With investing, there's a lot of data to sort through so scrutinizing your own research for how your biases affect your data became a must if one hoped to truly maintain a competitive perspective in data analysis. One of my strong biases for example is a preference to Nobel Prize winner's. My investment philosophy is based off that of several, Harry Markowitz, William Sharpe, Eugene Fama and Daniel Kahneman. I think it's logical to have that preference and bias, however the trick is figuring it out before they get the Nobel.