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No Default Is Also a Default

As soon as you try to change a system there will be resistance. People don’t like change; they are novelty averse, risk averse (the new system may not work), ambiguity averse (what do we really know about the new system?!). People can be all types of averse to changes. People prefer the devil they know. This is known as the status quo, or the default bias. One thing people seem to strongly dislike is the changing of the default. To go from an opt-in system to an opt-out system, for example. Research found that nudges, changes in choice architecture, or simply the context in which we make decisions, are severely disliked if they rely on people’s biases to work. Here the bias we work with is default bias, a clear preference for the status quo. Or worse: people’s inertia, their laziness and their complacency. People really do not seem to appreciate that approach. However, it is one of the most effective nudges in our toolbox.

The fear of a change in default is rooted in a very powerful misconception: the idea that a policy maker is now adding something that wasn’t there before, which could have detrimental effects to the individual. The emphasis here is on the adding. A new default is not an addition. It couldn’t possibly be. Because a change in default is exactly what it says on the tin: a change. It does not add, it does not remove, it simply replaces. The misconception is that somehow, there wasn’t a default before and now is being instated. But that’s not how defaults work. A famous example that shows the success of a change in default often referred to is that of organ donation. The original default for organ donation is to have people sign up (opt-in) for being an organ donor. Organ donations in countries with this system in place has historically been low. When countries change their defaults to being opt-out, meaning the individual has to indicate they do not wish to be an organ donor. Countries that have opt-out policies in place have seen historically much larger percentages of organ donations. And countries that changed their policies from opt-in to opt-out have seen significant increases in organ donations. The default clearly matters. Now important to know for defaults, and all nudges, is that they are choice preserving; they do not make it impossible for people to opt-out (or in). In the Netherlands (my home turf), opting out of organ donation is going onto a website (or app) affiliated with the Dutch government and de-selecting a tick box. Anyone with strong feelings against organ donation should be able to find it within themselves to do so. And that’s exactly the point: the majority of people do not have particularly strong feelings about what happens after they die; so they might as well be helping those who are struggling to stay alive and need additional organs to be able to do so.

I think the organ donation example highlights the fact that there really is no such thing as ‘no default’. Here it is having to opt-in. For a lot of pension schemes it’s having to save a minimum %, or not even save at all. For Germany it’s to pay in cash, in the US to pay with a credit card and in the Netherlands to pay with debit cards. These are all defaults partially based on legality and social convention. I challenge you to come up with situations in which there is truly no default; where the changing of the default can actually be perceived as adding something. Keep in mind that with these criteria in place, entirely novel situations do not count. Defaults also exist out of the policy realm, where nudging, and therefore also new default setting, experienced its original successes and popularity. Common more commercial defaults are to pre-selected tipping amounts (20% is pre-selected in the US, 10% in Australia, most often), automatic enrollment in subscriptions when signing up for a trial, pre-selected subscription plans or choice options (often the medium one, to also play on extremity aversion), etc. etc.

Now the thing I find fascinating as a behavioural scientist, is again the resistance to changes in defaults, based on the argument that the status quo does not encompass a default. As argued before, it most definitely does. People seem to prefer the devil they know. They do not perceive themselves to be ‘stuck’ in the current default. It’s only that when a new default gets announced, that people may worry about what the new default could possibly mean for them. The question what the current default means for them, or what it even is, often does not get asked. The issue is that just because you do not perceive yourself to be currently stuck in a default, does not mean that you aren’t stuck in one. A great example here is undersaving for retirement. People often enrol in 401(k) schemes (US) or super contributions (AU) at a default rate. The one in the US is often low, if it exists at all, and the one in Australia is legally set at 10%. The Australian government is thankfully quite ahead of most countries in terms of applied behavioural science, so they simply made it a legal requirement and as such a default, because they were very aware of the nightmare that it is to instate a new default if it’s not legislatively backed. As a result, Aussie’s now save 10% of their income in supers (retirement funds). They can choose their own fund manager, but, by default, are enrolled into the one associated with their employer, as the employer is responsible for paying this 10% of pre-tax wage (but this also very easy to change, by the individual). The States, in this regard, is a nightmare. Even the employer-match schemes see low levels of uptake, where people are essentially leaving ‘free money’ on the table. Now imagine any US government trying to set a mandatory contribution rate of 3% (which is too little, but it’s something). Legislatively this is a nightmare, because Americans don’t like their freedom impacted in any way (but are somehow completely comfortable with the idea of undersaving). It’s the same argument again: don’t impair my freedom by imposing a default. Not taking into account that a default already exists: one of not saving or insufficient saving. One that is actively harmful.

How can we make the debates surrounding defaults better? How can defaults become more easy to accept? What can policy makers do? And is this simply a function of culture? Of governmental acceptance? Of the policy being truly in favour of the majority of people, not just the ones with most influence? Policy as an area is not my expertise – so if it is yours, please, let’s have a discussion. You know where to find me.

Behavioural Science

Personal Finance



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