Defaults

The Basic Idea

Simply put, a default is the outcome a decision-maker gets under the status quo. It’s the pre-set option that is made available when we do nothing, and requires no effort on our part. For example, when you subscribe to Netflix, your subscription automatically renews at the end of the monthly cycle, unless you choose to cancel it. Automatic renewals are a common example of defaults, and they’re cleverly based on the well-researched principle that human beings are naturally predisposed to inertia – aka the status quo bias.

Defaults, when deployed correctly, can be very effective in encouraging people to take a particular course of action. Another example of a default is an ‘opt-out’- approach to a scheme or policy. Organ donation is commonly used to argue the effectiveness of opt-out policies, since donation rates are much higher in places with opt-out policies than those which use opt-in, where a person needs to take action to become an organ donor.

If you want to encourage some activity, make it easy.

– Richard Thaler, Nobel Prize Winner and co-author of Nudge: Improving Decisions about Health, Wealth, and Happiness1

Key Terms

Default

The predetermined outcome a person gets under the status quo. Examples of defaults include automatic renewals and opt-out policies.

Status Quo Bias

The human preference for the current state of affairs, which results in inertia and resistance to change.

Inertia

The tendency to do nothing and/or avoid change.

Nudge

A phrase coined by Professors Richard Thaler and Cass Sunstein to explain “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”

History

The idea that people tend to opt for the status quo, or end up with the default outcome, has been investigated from many angles. Studies on the status quo bias from the mid 20th century link our preference for inertia to concepts like cognitive overload and loss aversion.

Fast forward to the early 2000s when University of Chicago Professor, Richard Thaler, and Harvard Professor, Cass Sunstein, started to develop their theory of ‘nudges’, which soon became one of the most iconic concepts in the field of behavioral economics. In their 2008 book ‘Nudge: Improving Decisions about Health, Wealth, and Happiness’, Thaler and Sunstein explained their idea of ‘libertarian paternalism’ – a ideology that allows choice architects (people who present decisions to decision-makers) to encourage or ‘nudge’ people towards a preferred option, while still allowing them freedom of choice. It is in this context that defaults were recognised as powerful ways to influence people to do what we want them to do. Since people generally want an easy life, and usually select the easiest option available to them, policy-makers and businesses should make their preferred option, the easy option, and ideally the option that requires no effort whatsoever!

In their book, Thaler and Sunstein explore several real-world cases of where defaults have been hugely effective. One commonly cited example is that of automatic pension enrollment in the United Kingdom, where pension participation rates increase by almost 40% in the first three years of the policy.

People

 

Richard Thaler

Considered the ‘Father of Behavioral Economics’, Richard Thaler is the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. He won the 2017 Nobel Memorial Prize in Economics and has published hundreds of papers in psychology, economics, public-policy and management.

Cass Sunstein

Cass Sunstein is the Robert Walmsley University Professor at Harvard Law School, having previously served as Administrator of the White House Office of Information and Regulatory Affairs in the Obama administration from 2009 to 2012. He is the author of two New York Times best-sellers – The World According to Star Wars (2016) and Nudge (2008 with Richard Thaler), and as of 2021 is the most cited legal scholar according to online repositories.

Consequences

Defaults have had a major impact on policy-makers and businesses all around the world, especially in the last decade since Thaler and Sunstein published ‘Nudge’. Several governments have developed ‘nudge-units’, or behavioral science teams within the civil service, responsible for creating and implementing default public policies. One trailblazing example is the Behavioural Insights Team in the UK, who’ve implemented a range of successful interventions based on defaults, including; pension enrollment, charitable donations, road safety, crime, and environmentally friendly behavior.

Defaults continue to be used with gusto in the private market, as demand for subscription services continues to grow rapidly. Whether it’s newspapers, TV/movie streaming, beauty products, dinner kits or greeting cards – nowadays it feels like there’s a subscription for anything you could possibly want or need. And since it’s such a nuisance to cancel them once we’ve subscribed, we usually end up being paying customers for much longer than we’d like.

Controversies

Given the attention that Nudge Theory attracted, both in academic and mainstream circles, it’s only fitting that the idea of defaults as policy tools also attracted some criticism.

In a compelling 2012 paper 2, Lauren Willis identified two ways defaults can be undermined. Firstly, the defaults put in place by the law are not always sticky. Sometimes it’s relatively easy to opt-out of policies, or there are competing forces that offer people a greater incentify to reject the default. For example, some utility providers offer customers a ‘switching bonus’ if they choose to leave a competitor’s service. Another problem with defaults is that the people who do opt-out of default situations, are often people who would benefit the most from the default. Again, this can be as a result of a competing force encouraging people down another path. One instance of this was experienced in the US banking system when customers were encouraged by bank advertisements to opt-out of default overdraft protection policies, only to incur high overdraft charges as a result.

The last challenge to defaults that is worth mentioning is the ethical argument. Many people argue that defaults have been deployed in a way that traps people, making it confusing and difficult to opt-out. How many times have you tried to cancel that newspaper subscription, only to give up after a few minutes because it’s just so complicated? This is especially true in subscription business models, or contracts that involve high switching costs like those offered by cell phone providers. Has the use of defaults gone too far, and are companies exploiting people’s natural tendency to stick with the status quo, a bit too much?

Thankfully Sunstein is said to be addressing this problem, which he refers to as ‘sludge’ in his upcoming book ‘Sludge: Bureaucratic Burdens and Why We Should Eliminate Them’ (expected in September 2021).

Case Study

Increasing Charitable Donations in the UK 3

In 2012, the UK-based Behavioural Insights Team engaged in a project with Home Retail Group – one of the largest retail companies in the UK. The company owns the Argos and Homebase brands, and has 50,000 staff across 1,079 stores.

The company hoped to increase their payroll giving programme, where employees could donate a percentage of their paycheck to charitable causes. At the beginning of the intervention, the programme had a participation rate of around 10%. Slight changes were made to the payroll giving forms, which made enrolment onto the programme the default, but still gave new donors the ability to opt out should they wish to do so.

Following the intervention, the rate of enrollment in the scheme rose to 49% of Home Retail Group’s employees. The Behavioural Insights Team estimated that “If instituted across all payroll giving schemes in the UK, this could raise an additional £3million for charities per year.”

Related TDL articles

Can Defaults Save Lives? – The Power of Default Options on Life-Saving Decisions

When it comes to designing policy, decision-makers need to be mindful of how default settings create a path of least resistance, one that is likely to have a powerful influence on people’s choices.

Status Quo Bias

The status quo bias describes our preference for the current state of affairs, resulting in inertia and/or a resistance to change.

Nudges

Nudges are interventions that capitalize on human biases, in a non-coercive way. A nudge intervention is one where the desired outcome is made the default option.

Sources

  1. Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. Penguin.
  2. Willis, L. E. (2013). When nudges fail: Slippery defaults. The University of Chicago Law Review, 1155-1229.
  3. Behavioral Insights Team (2013). Applying behavioural insights to charitable giving. Cabinet Office. https://www.bi.team/wp-content/uploads/2015/07/BIT_Charitable_Giving_Paper-1.pdf

Read Next