Nudges and Espresso

A funny thing happened this morning on the way to Starbucks.

After dropping off my 10-year old daughter at school, I drove my 1-year old son down the street toward our usual coffee shop.

"Doppio espresso, that's what I want," I thought to myself as I looked happily at the gentle gray overhead.  Chilly, overcast, a classic winter morning in Cleveland.

I turned into the shopping center and entered the drive-thru lane.  "Yep, doppio espresso."  No doubt about it.

I pulled up to the speaker and was greeted warmly by the voice inside the machine.  I glanced down at my phone as I pulled up the app.  "Doppio espresso," I repeated inside my head.

As the app loaded on my phone, I saw a promotional message, something like this: "LATTE CHALLENGE!  ORDER A LATTE!  LATTE!!"

I made my order, picked it up at the window, and sipped my triple grande latte as I drove my son back home.

How did that happen?!?

SBUX.  Note the weekly RSI approaching the key 40 level...

This is a classic example of nudging, where my behavior was influenced by a subtle (or perhaps not so subtle) suggestion of what choice I should make.  In his famous book Nudge, Nobel Laureate Richard Thaler discusses many examples of this marketing strategy.

In perhaps his most notable contribution to personal wealth, he suggested making retirement accounts such as a 401(k) plan become "opt-out" instead of "opt-in."  Participation went through the roof once people were automatically entered into the plan and had to take action to remove themselves.  (This is also a great example of status quo bias!)

Nudging is truly at the core of much of our wired lives these days.  It's why your social media feed is populated with products you're likely to buy.  It's how your search engine subtly points you to the links it wants you to click on.

It also dramatically affects your investment decisions.  How did you make your most recent investment decision?  Where did you get the idea?  Did someone point you to it?  Did you read about it somewhere?  Was it based on an ad you saw during the Super Bowl?

As I sit here sipping my triple grande latte, I'm left reflecting on the "information dilemma" for investors.  There's tons of information out there- so many potential sources of ideas, so much potential noise that could prevent me from making a sound investment decision.

I think in the end, I love talking markets with others.  I love comparing notes and learning from others' successes and challenges.

But I have to remember that in the end, nudged or not, the ultimate decision is my own.


Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice.  Please see the Disclaimer page for full details.