Americans have one of the worst personal-savings rates of any industrialized nation. For every $1 in income earned, the average German citizen saves about $0.10 of it. Whereas, for every $1 in income earned, the average American spends approximately $7,300 on a plasma-screen television.
Roughly 30% of employees fail to join a 401(k) plan, according to University of Chicago professors Richard Thaler and Cass Sunstein. Because employers typically match the amount their employees contribute to such a plan, failing to enroll is the equivalent of joining an “I Hate Money” club. And it’s not that Americans believe they’re doing the right thing: Surveys show that the great majority of employees believe they’re not saving enough. It’s a major social problem.
Economists tell us that people will save more if given incentives, but that’s the whole point of a 401(k), and still 30% of people aren’t taking the bait. In their fascinating new book, Nudge, Thaler and Sunstein ask a provocative question: If you design a choice the right way, could a small nudge help people make better decisions? Even if the nudge didn’t offer any extra incentives?
Any plan to get people to save more must overcome two big barriers. First, people hate to see their take-home pay decrease. Unfortunately, due to the heartlessness of mathematics, this is what happens when you suddenly increase your savings rate. Second, self-control always seems harder now than in the future (“I’ll sign up for yoga classes next week”). So Thaler and a colleague invented an ingenious program to skirt these two barriers, and they called it Save More Tomorrow.
Save More Tomorrow asks people to make this commitment: If you get a raise, you’ll save most (but not all) of it. So if you’re in line for a $5,000 raise next year, the program might ask you to commit to saving $3,500 of it. Your commitment kicks in by default when the raise occurs; you don’t need to take any further action. And note that you’ll never see your paycheck decline. The result? During a three-and-a-half-year study, employees left to their own devices saved about 6% consistently. During the same period, their colleagues who were enrolled in Save More Tomorrow more than tripled their savings rate, from less than 4% to more than 13%.
Save More Tomorrow suggests what’s practically a golden rule of nudging: You need to get laziness on your side. Or to be more charitable, make inertia work for you. Right now, if an employee isn’t saving much, inertia is on the side of spending. He could, at any moment, decide to buy fewer lattes so he could save a bit more, but inertia will fight him. With Save More Tomorrow, the inertia flips to saving. He could, at any moment, call up the HR administrator and lower his savings rate so he could pad his coffee budget. But he won’t. Suddenly, inertia starts working for the employee’s long-range goals rather than against them.
Because inertia is so crucial, world-class nudgers recognize that the default option is critical. Chances are, you weren’t craving the USA Today that came with your last hotel stay, but you just couldn’t be bothered to call the front desk and reclaim your $0.75. (Notice that if the default option were reversed, and you had to call to get your copy, there’d be more trees and fewer infographics in the world.)
The default option sways us in high-stakes situations also — even ones that involve our own organs. In Germany, as in the United States, you have to opt in to become an organ donor. Only 12% of Germans have given their consent to donate, so lots of patients languish in hospitals waiting for a kidney or heart to become available for a transplant. In Austria, though, people are organ donors by default. They’re given the right to opt out any time they like, but they don’t. The percentage of Austrians who are available as organ donors is 99%.
Can you influence the ordinary operations of your business with the right nudge? The experience of Rackspace, an IT hosting company, suggests that you can. Several years ago, as hosting began to seem a commodity, Rackspace made the decision to define itself based on the quality of its customer service. To deliver on this value proposition, employees had to spend more time helping customers and less time solving technical issues.
The cofounder, Graham Weston, made the dramatic decision to remove the call queue — the automated system that picks up the phone when customers call, assuring them that their call is important before it prompts them to press 1 or 2 or 3. Without this system, the environment changed. “Now when the phone rings, somebody has to pick it up,” Weston says. “There’s no safety net anymore.” Needless to say, Weston’s action made speedy customer service the new “default option” for employees at Rackspace. (Whether this constitutes a nudge or a shove is up for debate, but Weston says that it works.)
In physics, inertia is an object’s resistance to a change in its state (per Newton, an object in motion tends to stay in motion, and an object at rest tends to stay at rest). Business inertia is similar, though some employees will grouse about being called “objects.” If employees are saving, they’ll tend to keep saving. If they’re serving customers well, they’ll tend to keep doing it. The discipline of nudging gets people going in the right direction. Once the momentum picks up, people are hard to stop.
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Dan Heath and Chip Heath are the best-selling authors of Made to Stick: Why Some Ideas Survive and Others Die.