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

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.