Richard Thaler, Nobel Prize-winning Economist, Says Wells Fargo Is Slimy

The father of nudge theory says Wells Fargo is using “sludge” theory to avoid refunding customers’ money.

Behavioral economist Richard Thaler, who won the 2017 Nobel Prize in economics, called Wells Fargo WFC, -0.12%   “slimy” in a tweet Thursday, and nominated the scandal-plagued bank for an ignominious title. “Oh, this is slimy indeed. Thick #sludge. We need a #sludge hall of shame. Please send nominees,” he wrote.

Thaler was referring to the bank’s method of reimbursing 110,000 customers who were improperly charged monthly fees. The Wall Street Journal reported this week that the bank will offer to reimburse those customers by mailing them form letters and asking customers to opt in to receive repayment and mail back a form to get their check. Because so few people typically respond to form letters from businesses, Wells Fargo expects that only “half or fewer” of the people it owes money to will take the bank up on the refund offer, the Journal reported.

The plan quickly caught the eye of behavioral economists, who dubbed it an example of “sludge,” meaning the opposite of nudge theory, which is supposed to harness people’s decision-making instincts to help them make better choices for their well-being.

A Wells Fargo spokeswoman said in a statement that the bank is “focused on making things right for our customers and ensuring this large-scale remediation happens correctly and as quickly as possible.” She added, “Communications to date have been intentionally focused on accounts with smaller refunds and requests for customers to send us additional information.” Wells Fargo expects the process to be complete by the second quarter of 2018.

A classic example of nudge theory in action is when companies automatically enroll employees in 401(k) plans that workers must opt out of if they don’t want to participate. While traditional economic theory holds that people act rationally in their own best interest, Thaler pioneered the idea that people are sometimes irrational decision makers who need “nudges” to achieve financial goals.

“Whenever anyone asks me to sign a copy of the book ‘Nudge’ I sign it ‘nudge for good’ which is a plea, not an expectation, because it is possible for actors in both the public and private sector to nudge for evil,” Thaler told MarketWatch.

A nudge is a “feature of the environment that influences a person’s decisions without removing choices,” Thaler explained. One way to nudge is to make selecting the desired choice easier, for example by making that choice the default, as companies do when they automatically enroll workers in 401(k) plans. But it’s easy to envision more nefarious nudges. “For example, a government could adopt a policy in which taxpayers had to find a special place on their tax return to opt out of “donating” $1,000 to the head of state’s re-election campaign,” Thaler said.

There are plenty of ways businesses can use nudges, and not all of it is for good, he noted. For example, when a company makes it hard for people to redeem a rebate by requiring them to take many steps, including cutting out and mailing in the SKU label on the box, this is benefiting the company at the expense of the customer, Thaler said. “I call this ‘sludge,’ not just because it rhymes with nudge, but because it works by intentionally slowing down the process by which a customer gets what is rightfully hers.”

“In this case Wells Fargo appears to be guilty of doubling down on sludge,” Thaler said. “First they were found to be guilty of tricking people into signing up for products they did not want, and then when caught, are making it difficult to get the compensation they are owed.”

Thaler’s nudge theory has helped retirement savers substantially in the past decade — to the tune of about $29.6 billion, perhaps, according to a recent report by fellow researcher Shlomo Benartzi, professor of behavioral decision-making at the UCLA Anderson School of Management. Between 15 million and 16 million people have boosted their savings rates — four times as many as in 2011, according to Benartzi and Thaler’s research.