Samples of the 2008 Beijing Olympic medals on display at the Official Metal Handover Ceremony for the Beijing 2008 Olympic & Paralympic Medals, in Shanghai, China. (Photographer: Qilai Shen/Bloomberg News)

Don't Underrate the Power of the Default Option

(Bloomberg View) -- If Olympic medals were awarded for the most powerful tools in behavioral economics, what would win the gold?

The answer is clear: default rules, which decide what happens if people do nothing at all.

Your cell phone comes with default rules: A lot of settings are prescribed for you, and you have to change them if you want something different. Deductions from your paycheck for a 401(k) plan will continue so long as you don’t take action to have them stopped. The law itself provides default rules that affect your relationship with your employer and your bank.

Though people are free to change the default, they usually don’t -- which helps explain why that automatic enrollment in retirement programs or in energy plans can have a huge impact.

Why are default rules so powerful? In “Waiting for Godot,” Samuel Beckett offered a brief answer:

VLADIMIR: Well? Shall we go?

ESTRAGON: Yes, let's go.

They do not move.

Human beings often suffer from inertia. Even if it is easy to go, or to change the default, they just don’t move. We take the path of least resistance. (Habits operate a lot like default rules, which explains why they tend to stick -- a word of warning for those who make New Year’s resolutions.)

All this may seem obvious, but new research, from two independent teams of researchers, shows that it isn’t. Business executives, doctors, law students and other adults do not understand the power of default rules. And in an important court order, involving large economic stakes, a federal judge also failed to anticipate their power.

The first study, conducted by Stanford’s Julian Zlatev, Hakin Kim and Margaret Neale along with David Daniels of Hong Kong University of Science and Technology, asked more than 2,800 American adults how they would proceed if they wanted to influence people to choose a particular option. The areas they tested were diverse, including consumers’ choices among insurance policies and patients’ choices of medications. In all cases, participants were given the option to present one option as a default -- and to use that strategy to influence people’s choices.

Most people failed to use that strategy; they did not seem to realize that defaults matter. Some participants in the study (including the executives) did a bit better than others -- but they didn’t use defaults nearly as often as they should have.

Zlatev and his colleagues also investigated people’s beliefs about the effects of default rules. They found that about 60 percent of their participants did not even realize that more people would choose an option if it was the default.

In the second study, a team, led by Robert Letzler of the Government Accountability Office, explored how the legal system might use default rules to combat fraud.

The sad tale began in 2000, when a telemarketing firm, Suntasia Marketing, persuaded hundreds of thousands of consumers to pay a monthly fee for subscriptions that were essentially worthless. Telemarketers called people out of the blue and said (falsely) that they represented the consumer’s bank. They reported good news, to the effect that the consumer had won a reward, consisting of (for example) a subscription to a “buyer’s club,” which would offer consumer gasoline and airline rebates. On average, consumers paid Suntasia $239 over the course of their subscriptions, and received nothing in return.

In 2007, the Federal Trade Commission sued Suntasia. In response, the court directed the company to notify its subscribers of their right to cancel. According to the court’s order, subscribers who had been enrolled for six months or less would receive a letter saying that they would be canceled by default -- but adding that they could continue if they wished (by letter or phone call). Those who had been enrolled for more than six months would receive a letter saying that their subscriptions would continue by default -- but adding that they could cancel if they wished (also by letter or phone).

Did the default rule matter? Absolutely.

When subscriptions were canceled by default, almost everyone ended up canceling -- a stunning 99.8 percent. But when people were merely notified of their right to cancel, most people ignored the letter and so continued to subscribe (about 63.2 percent).

That’s not because they were benefiting from their Suntasia subscriptions. Letzler and his colleagues demonstrate that nearly all subscribers would have gained from canceling. Among those who were asked to cancel actively, cancellation rates were especially low in poorer areas and among racial and ethnic minorities.

We don’t know why that’s so. It might reflect a failure to open the letter or a lack of understanding; it might reflect the fact that the recipients’ attention was focused on more pressing matters. Whatever the explanation, it’s disturbing. A court order, giving people an opportunity to save money, was especially unhelpful for those who most need to save money.

There are two lessons. The first is that because the court did not sufficiently appreciate the power of default rules, it made a big mistake. For all subscribers, cancellation should have been the default.

The second is that even when they are terrible, default rules might well turn out to stick. Whether or not some voice in our heads proclaims “Let’s go,” we might not move.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “#Republic: Divided Democracy in the Age of Social Media” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”

To contact the author of this story: Cass R Sunstein at csunstein1@bloomberg.net.

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