Nudge versus Sludge



Enter Richard Thayler, a behavioral economist, and a legal scholar named Cass Sunstein. Candidly, a behavioral economist and legal scholar do not set the stage for a book laypeople sprint to the store to read. Yet in 2008, that is exactly what happened. Their book Nudge sold millions of copies, becoming a New York Times bestseller. Its message resonated with governments, corporations, and families alike.

Their book focused on how we make choices, and how we can inspire ourselves to make better choices. Instead of mandating changes or forcing ourselves to do something differently, they advocated for other ways to create meaningful change, whether it be for a young child or an entire country’s healthcare system.

They argued that the key to many outcomes we want lies less with heroic efforts of will, and more with making things easier, more convenient, or simpler. Of course, willpower is still indispensable for many difficult things in life, but relying on it alone can be…precarious. Willpower takes us only so far.

The perfect example: food. Opening the fridge for a snack and finding at eye level the perfect amount of already washed, ready to eat carrots makes the healthy choice easier. Compare this with carrots in a bag at the bottom of the fridge in a drawer, unwashed and out of sight. Which do you think is more likely to be eaten?

This idea translates powerfully into finance as well. Creating automated saving mechanisms makes it easier to save, as opposed to manually saving where we must make the same decision time after time—creating opportunities to decide not to save. Companies with 401(k)s are realizing this as well; people often do or do not participate simply based on what the default is, even when a company match is involved! By stripping away barriers to entry, you can encourage smarter behavior. Many companies now default eligible employees’ income partially into their 401(k) and then raise it by 1% each year until it reaches a certain level. People can change it any time, but most favor the path of least resistance. The outcomes, meanwhile, are life changing.

Of course, the opposite is true too: we can encourage bad habits by taking away barriers to entry. Credit cards, Apple Pay, and Amazon’s 1-Click Ordering are like financial Slip N’ Slides: they make it incredibly easy to spend by eliminating friction.

Thayler and Sunstein talked about this as well: sometimes we need a little sludge in our lives. The antithesis of a nudge, where our environment subtly predisposes us towards certain behavior, sludge is the introduction of something that deters us without explicitly penalizing or banning the behavior. Think of that cumbersome, convoluted process of filing an insurance claim. Think of how tedious and difficult it can be to switch banks.

We see this constantly. Clients depend on us as their Nudgers. We take care of paperwork and cut through the red tape to help them implement beneficial but complicated financial strategies. Backdoor Roth contributions, unwinding annuities or illiquid REITs, tax loss harvesting, consolidating accounts across decades of saving and half a dozen employers, estate planning strategies…the list goes on and on. The decision for clients goes from committing to a burdensome process to us taking care of it for them.

Clients also depend on us as their Sludgers. At least half a dozen clients of mine specifically open an account with us because they know they have to reach out to access the money. In a moment of impressive self-awareness, they safeguarded their emergency funds by placing us as their teddy bear security guard. If they ask for the money, we legally cannot tell them no, but the slight social awkwardness keeps them from tapping into it unless it is genuinely necessary.

Nudge reframes the question we ask ourselves. Rather than “How can I make myself do something?”, the question becomes “Why am I not doing this already?” Common sense tells us that different questions tend to lead to different answers. Hopefully the new answers provide better ways to create the lives and outcomes we want.

In the words of a great mentor of mine who was, ironically, a high octane willpower-over-all workaholic, “less effort, more result”.