Friday, December 14, 2012

Book Review of Nudge: Excellent

Here is a book that hasn't received much publicity, but has amazing information. Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein, was rated a Best Book of the Year by The Economist.

The book covers all kinds of decision making concepts, such as intuitive thinking. Here's an example. If a bat and ball costs $1.10 and the bat costs $1.00 more than the ball, how much did the ball cost? If you guess 10 cents, which is what most people choose, you would be wrong.

Investors will find Chapter 7, Naive Investing, a great read. Decision making about portfolio diversification, market timing, stocks versus bonds, and the risks of investing in your employer's stock, are all covered.

Chapter 6, Save More Tomorrow talks about how amazing it is that the number of people that don't take advantage of matching 401k plans is substantial, as the matching money is basically free. What is really amazing was a British study of companies that offered a free retirement plan fully funded by the employer with no contributions from the employee, and all the employee had to do was sign up. Yet amazingly only 51% signed up. The book discusses what employers can do to 'nudge' employees to take more advantage of retirement plans.

Shopping for mortgages and loans is covered in the chapter on Credit Markets. Of course, the sub-prime mortgage issued are covered in detail.

Even the Bonus Chapter on Twenty New Nudges was fascinating, especially the one on Make-believe Speed Bumps, a few of which I've seen in several parking lots.

If you ever make decisions in your life, you need to read Nudge.

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