Sep 02, 2023  | Tags: nudging, money management

Our insights

The Cambridge Dictionary describes “nudging” as the act of encouraging or persuading someone to do something in a way that is gentle rather than forceful.

When the Nobel Prize winner in Economics Richard H. Thaler and Cass R. Sunstein published Nudge in 2009, they brought new meaning to the term.

Subtitled “Improving Decisions About Health, Wealth and Happiness”, the New York Times bestseller illustrates that the choices we mark are rarely presented to us in a neutral way and that makes us prone to making poor decisions.

But by understanding the architecture of choices and the biases that influence us, we can make better, more informed decisions.

Applying the concept of nudging to economics and our own personal investment strategies helps people make better choices that lead to superior financial outcomes.

Embracing nudging

Embracing nudging is about acknowledging you don’t always make the best investment decisions and employing mechanisms that can help you do that.

It is understanding that sometimes even subconsciously, you will have pre-programmed tendencies to err when making a judgement call, even with that gut feeling you are making the wrong decision.

What you need is someone or something to “nudge” you in the right direction.

The three core principles of nudging are:

• nudges never “force” you to make a certain decision, the ultimate choice remains yours
• nudges analyse and leverage behavioural science about how we make particular decisions
• nudges are meant to be used for good

Set your financial goals

Before you start using the principle of nudging, you need to establish some clear financial goals.

Why are you investing and how long is your time horizon?

Try to visualise these financial goals and your desired outcome as often as possible because they act as nudges to help you remain on course.

Automate savings and investments

Automation is one of the most effective nudges.

It makes pre-programmed decisions on your behalf without second guessing.

Consider setting up your accounts to make regular transfers from your savings account into your investment account.

This will help you to keep investing money before you can impulsively spend it.

In effect, you are nudging yourself to save and invest rather than fritter away your earnings.

Framing

When considering an investment decision or opportunity, consider how it is framed or pitched.

Think about the language and graphics used to illustrate an outcome which may potentially be “sold” or misrepresented.

Scratch beneath the surface to objectively evaluate all options based on the reality of their value rather than the perception being presented. 

Regularly reassess your investments

Nudging yourself to regularly reassess your investments and financial position is critical to remaining on the pathway to success.

It is important not to assume that past decisions remain the best ones in what may be a changed economic climate.

Avoid the “endowment effect” of overvaluing what you already own by ensuring your investments remain aligned with your goals and current market trends.

Overcoming loss aversion

No-one likes to back a loser or pull the wrong financial rein.

But it is important to nudge yourself into appreciating that this is all a part of the investment journey and some losses are unavoidable and part of the process.

The important thing is to stop those losses from becoming too great and learning the lessons to avoid making the same mistakes again.

Minor setbacks can also provide opportunities for growth.

Employ social proof

Harness the power of social proof by garnering advice and inspiration from financial experts.

This nudge will help you grow your confidence and self-belief and allow you to make more informed investment decisions.

Ways to do this include:

• joining investment groups
• reading relevant literature
• talking with and learning from seasoned investors
• Working closely with your financial adviser

Embrace mental accounting

Mental accounting involves compartmentalising your finances.

Nudge yourself to create separate accounts that satisfy different goals.

These may include a retirement fund, an emergency fund and another for short-term expenses.

This process allows you to manage your money more effectively and reduces the likelihood of impulsive spending.

Celebrate small wins

Enjoy your financial victories, regardless of their size.

This nudge is about acknowledging your progress with positive reinforcement.

It’s a little pat on the back to encourage you to continue down the path and remain committed to your financial end game.

Get advice today

CWM are financial experts who can help “nudge” you in the right direction so that you make the best financial decisions now and going forward.

We’ll work with you to devise investment strategies whatever your financial goals, acting as your experienced, unbiased mentor.

No-one should do without quality financial advice from someone personally invested in their wealth accumulation.

We pride ourselves on leading our clients into the future with structure, financial stability and confidence.

That’s where Calder Wealth Management can assist.

CWM are financial experts who can help you make the best financial decisions for your family now and going forward.

We’ll work with you to devise investment strategies whatever your family’s financial goals.

No family should  go without quality financial advice from a team personally invested in its wealth accumulation.

At CWM, we pride ourselves on leading our clients into the future with structure, financial stability and confidence. 

Contact us today to discuss all of your financial needs and concerns.

Written by Anthony Hill

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.