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Nudge: Effective medicine against acute inertia in wealth creation. An analysis of Thaler & Benartzi's approach with German private investors

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  • FOM Hochschule für Oekonomie & Management, iwp Institut für Wirtschaftspsychologie

Author

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  • Kallenbach, Marcel

Abstract

Investors appear to regularly fail to make adequate investment decisions in the context of financial provision because of both economic and psychological irrationality. However, despite an economic urgency to make appropriate investment decisions for a secure financial future, people tend to neglect those decisions due to bounded rationality. Thaler and Benartzi's (2004) Save More Tomorrow™ program is an effective means to overcome psychological irrationality by nudging investors within a framework based on libertarian paternalism. SMarT™ appears to be quite effective in the context of company pension plans, but there is no evidence on German investors and investment decisions beyond company pension plans. Therefore, this analysis aims to explore how psychological strategies, such as SMarT™, can be implemented among German investors to improve investment decisions. This analysis employs a quantitative-deductive research approach designed as a cross-sectional analysis by exposing participants to a fictitious investment situation and manipulating a total of six decision situations through various nudges based on a comprehensive conceptual background, whose effectiveness in terms of differences in average savings rate increase amounts is then compared with two corresponding control groups. The data were collected through an online questionnaire (n = 226). While all nudges led to higher increase amounts than their respective control groups, one specific nudge proved to be particularly effective with a large distance: Subjects chose the highest increase amounts when exposed to a nudge based on defaults and preset assumptions in percent without additional anchor-based or social validation-based nudges. Since this study is a cross-sectional analysis, it remains open whether the observed decisions are consistent over time. As this method is based on hypothetical financial decisions, there are no real financial interests at stake, which could have influenced the decisions. Finally, some results could not be explained by the present conceptual background and therefore need to be supplemented by further research.

Suggested Citation

  • Kallenbach, Marcel, 2025. "Nudge: Effective medicine against acute inertia in wealth creation. An analysis of Thaler & Benartzi's approach with German private investors," iwp Schriftenreihe, FOM Hochschule für Oekonomie & Management, iwp Institut für Wirtschaftspsychologie, volume 21, number 324147 edited by FOM Hochschule für Oekonomie & Management, iwp Institut für Wirtschaftspsychologie.
  • Handle: RePEc:zbw:fomiwp:324147
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    References listed on IDEAS

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    1. Richard H. Thaler & Cass R. Sunstein, 2023. "Libertarian paternalism," Chapters, in: Cass R. Sunstein & Lucia A. Reisch (ed.), Research Handbook on Nudges and Society, chapter 1, pages 10-16, Edward Elgar Publishing.
    2. Annamaria Lusardi & Pierre-Carl Michaud & Olivia S. Mitchell, 2017. "Optimal Financial Knowledge and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 125(2), pages 431-477.
    3. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 48(Jun).
    4. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-192, May.
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