Behavioral Economics and BrainWise

Posted On: November 15, 2017

Richard ThalerUniversity of Chicago professor and economist Richard Thaler, Ph.D., received the 2017 Nobel Prize in Economics for demonstrating that individuals consistently make thinking errors that sabotage their financial decisions.

Dr.Thaler says “I try to teach people to make fewer mistakes. But in designing economic policies, we need to take full account of the fact that people are busy, they’re absent-minded, they’re lazy and that we should try to make things as easy for them as possible.”

In BrainWise terms, Dr. Thaler is talking about how people’s emotions trigger Lizard Brain impulses that override their Wizard Brain’s more rational decisions on how to save and spend money.For them, emotions that range from excitement to craving and self-aggrandizement to arrogance underlie impulsive and irrational spending. When it comes to making financial decisions, people high on the emotions elevator ignore red flags, bypass good advice, and justify their faulty choices. This emotional hijacking explains how even smart people make poor economic choices.

Thaler links this poor decision-making to the consequences errant spending behaviors have now and later (CNL), as well as the financial consequences affecting others (CAO). His solutions have led to creative and successful ways for people to manage their money. He developed the “Save for Tomorrow” retirement plan where participants deposit future salary increases in a retirement account. He also supports the automatic enrollment of workers in 401(k) programs, a process where employers make monthly withdrawals from paychecks for retirement savings. The Nobel committee said that “he has shown how human traits systematically affect individual decisions as well as market outcomes“.

To reinforce rational thinking about finance to support the behavioral economics heralded by Dr.Thaler, infuse BrainWise exercises into financial problem examples.

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