The Power of Defaults: How Small Changes Influence Big Decisions
By Dhanesh Amin
In today’s economy, consumers face a seemingly endless array of choices. Each of us makes about 35,000 decisions daily. These range from simple choices, like what to eat for breakfast, to complex ones involving relationships, finances, or work. However, due to limited time and energy, many decisions go completely unexamined, and consumers often rely on a preselected default.
Consider an auto-renewing Netflix subscription, automatic retirement plan contributions, or a default web browser. These are all passive selections made simply by using a service or product. Whether consciously or not, consumers make choices merely by allowing the defaults to stand.
In the early 2000s, behavioral economists Richard Thaler and Cass Sunstein popularized the concepts of “nudges” and “choice architecture” to describe how thoughtfully set defaults can encourage certain decisions without limiting personal freedom. This idea rests on people’s preference for simplicity and stability. By eliminating the need for extensive comparisons and deliberation, defaults help conserve valuable resources like time, energy, and even money.
A key principle behind defaults is loss aversion, which suggests that people feel the pain of loss more strongly than the pleasure of gain. Changing from the default can feel risky, creating uncertainty and discomfort that discourages deviation from established norms. This natural tendency stacks the odds in favor of the default.
Choice architects often design defaults that align with beneficial choices for the average person, reducing mental strain and simplifying decisions. While some view defaults as a form of manipulation, they can lead to positive outcomes for individuals and society alike. For instance, companies like Verizon and Boston Consulting Group use an “opt-out” system for retirement savings. Employees are automatically enrolled in a retirement plan at a pre-set contribution rate unless they actively choose not to participate. Contributions are deducted from each paycheck, and although employees can change their contribution rate or opt out at any time, most stay with the default. As a result, many employees end up accumulating substantial amounts they might not have otherwise saved.
Despite these benefits, defaults have also drawn criticism for potential misuse. Some companies and industries set up defaults that favor them and disadvantage consumers. Examples include automatically renewing subscription services that consumers forget about, suboptimal healthcare plans with unnecessary testing, and lax data privacy agreements that sell user data. In these cases, companies sometimes rely on “sludge” — barriers that make opting out or adjusting settings difficult to bypass consumer suspicion. Consumers are often hesitant to read pages of contracts just to receive a service, and many companies rely on this oversight. These hurdles may involve navigating lengthy customer service calls or complex web forms, making it nearly impossible for users to break free from unwanted commitments.
On Oct. 16, 2024, the Federal Trade Commission announced a final “Click-to-Cancel” Rule making it easier for consumers to end recurring subscriptions and memberships. This new legislation will require sellers to make it as easy for consumers to cancel their enrollment as it was for them to sign up. For consumers, this means greater control over their subscriptions and fewer instances of being charged for services they no longer wish to use.
Defaults, while undeniably effective in shaping consumer behavior, can be a double-edged sword. When used ethically, they simplify decision-making and promote beneficial outcomes like increased savings or improved health. However, when leveraged for profit or manipulation, defaults can trap consumers in unwanted subscriptions or suboptimal choices.
Ultimately, the key lies in the responsible use of defaults; companies and policymakers must balance the convenience of defaults with transparency and fairness, ensuring that the power of choice remains firmly in the hands of individuals.