Building Financial Resilience by Jerry Buckland

Author:Jerry Buckland
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Rules of Thumb That Go Wrong

Thaler and Sunstein’s book Nudge (2008) is an important behavioral economic study as it presents a comprehensive framework and details on common financial mistakes individuals make. The study draws particularly on evidence from middle-class Americans which suggests a limitation in its data sources. Thaler and Sunstein identify the ways in which humans commonly make choices is less than reflective and more automatic ways and point out how this behavior deviates from homo economicus. They find that rather than collecting and analyzing salient data before making decisions, humans often use heuristics or rules of thumb, like the following: Anchoring, whereby we make assessments about a new question or issue based on something we are familiar with. For instance, we guess at the size of a city by “anchoring” that guess on the size of our own city. Financially speaking, before the subprime mortgage crisis, we might expect the stock market to behave like it did in the previous ten years.

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