DEFINITION: When presented with pre-set courses of action or defaults, we tend to accept what is presented. Intuitively, we often ‘go with the flow’, acting without considering other options and accepting what has been chosen for us.
A very simple example is the default (factory) password setting for our mobile phones or our voice mail, which we often never get round to changing.
If we were to make a wholly rational decision, we would consider the different options open to us in a considered and balanced way, and not be influenced by the option which has been selected for us. Yet, in reality, our decisions are likely to be swayed by a number of factors, such as:
- Inertia and laziness; James Choi, Professor of Finance at Yale School of Management says “It’s about inertia … the status quo is the choice that takes the least amount of effort.”; or
- When we are not sure what to do and lack expertise in the area in question. We consider the default as a form of advice, from those more knowledgeable than ourselves.
- The thought of switching away from the default may also bring to mind what we could lose by switching, which may make us reluctant to change.
- Procrastination around a decision, perhaps if the decision comes low down on our priority list;
Richard Thaler, behavioural economist and co-author of the bestselling book ‘Nudge’ says “The combination of loss aversion with mindless choosing implies that if an option is designated as the “default”, it will attract a large market share. Default options thus act as powerful nudges.”
One of the most well known applications of defaults is in the area of enrolment into retirement savings schemes and pensions. In this application of defaults, employees are automatically opted into a scheme by their employer, although they have complete freedom to opt-out if they so choose. Research conducted in the US by behavioural economists Brigitte Madrian and Dennis Shea found that auto-enrolling employees into a retirement savings scheme raised enrolment from 49% to 86% (Madrian and Shea 1999) and further research has found auto-enrolment boosts participation rates to over 90% (Choi, Laibson, Madrian and Metrick, 2001).
- In the US, auto-enrolment into retirement savings schemes (known as 401(k) private pensions or defined contribution pensions) has boosted enrolment rates dramatically. This has been aided by the 2006 Pension Protection Act which allows employers to automatically enrol employees in 401(k) plans. Employees still retain the right to opt out of enrolment. Automatic enrolment has increased 401(k) participation rates from typical 65-75% participation rates to 90% or more. And the majority of employers now offer this. In 2014, about 68% of American companies offered automatic 401(k) enrolment programs to at least some of their staff, up from 57% in 2010 according to a survey by Towers Watson.
- The UK also adopted auto-enrolment for pensions in 2012 and so far the impact has been positive for enrolment. Opt-out rates have been between 8-14% meaning that around 86-92% of the working population are now contributing towards a pension. A recent report by the National Audit Office found that between April 2012 and April 2014, the overall proportion of employees saving into a pension increased by 15 percentage points to 70%. The private sector was the main driver behind this rise; private sector saving rose by 21 percentage points over this period.
Case studies like this illustrate how defaults can significantly influence our behaviour. Behavioural economists, governments and companies are recognising this and are now beginning to apply the knowledge in many other areas including healthcare, payment systems, charity donations, green energy, environmental conservation and more.
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