Nudge: The Final Edition

by Richard H. Thaler

Consider two extreme “dream” scenarios. In the first dream, one being dreamt by a free-market economist with a peaceful smile on his face, advertisers are helping to educate consumers by explaining the benefits of lower costs, diversification, and long-run investing, as well as the folly of extrapolating recent returns into the future. In this dream, ads help each consumer discover his own ideal location on what economists call the “efficient frontier”—the place all rational investors want to find. In other words, the advertising helps consumers make better, smarter choices. The other dream is more of a nightmare, one that keeps psychologists and behavioral economists tossing and turning. In this dream, advertisers are encouraging participants to think big, not to settle for average (by indexing), and to think of investing as a way to get rich. In this nightmare, ads almost never mention fees. But they do talk a lot about past performance, even though there is essentially no evidence that past performance predicts future performance. (People who like to bet on sporting events will recognize a parallel in advertisements telling people about “locks” on upcoming games and about the amazing and nearly infallible forecasts over, say, the past three weeks.)