Find Your Place in the Sun Part 2: Auto Escalation
15 Nov 2018
A “Doubting Thomas” is a skeptic who refuses to believe in something without direct personal experience. As a student and professor, Professor Richard Thaler at the Chicago Booth School of business, used to be such a skeptic of traditional Finance and Economics that many now consider him “the Father of Behavior Economics.” Without a doubt Professor Thaler believes that traditional economics is flawed because (when it comes to money and finance) most people are not as smart or rational (about money and finance) as a traditional Economics Professor. Thaler believes, most people, would have a hard-time reading 692 pages of Adam Smith’s “Wealth of Nations” and finding any practical strategies that would help them save money for the future or become a better investor (especially when Monday Night Football is on).
Thaler, along with Professor Shlomo Benartzi (UCLA Anderson School of Management) and co-author of “Save-More-Tomorrow”, has used his skepticism to help millions of American’s save more into their retirement plans by making it easy and automatic. Here’s how it works:
- A new employee calls the payroll department and starts their 401(k), usually 3% or (hopefully) up to the match the employer offers.
- Instead of hanging up the phone, new employee asks to be signed up to the company’s
“auto-escalation program” that automatically increases the employee’s contributions once a year (usually scheduled around the time of a pay raise).
- Sleep on your investments like Rip Van Winkle.
Why does Professor Thaler include the 3rd step about? He describes this philosophy, “Rip Van Winkle would be the ideal stock market investor: Rip could invest in the market before his nap and when he woke up 20 years later, he’d be happy. He would have been asleep through all the ups, downs and in between. However, few investors resemble Mr. Van Winkle. The more often an investor counts his money-or looks at the value of his mutual funds in the newspaper-the lower his risk tolerance.”
So how can you find your place in the sun and save more for retirement? Professor Thaler (and Rip Van Winkle) would have you call up your 401(k) company and sign up for auto-escalation.