Active Choosing versus Default Rules

From: RegBlog

Brian Ryoo

In the 1980s, the national school lunch program found itself stuck in a demoralizing quandary: not enough poor children were qualifying, or even applying, for the program because it was too difficult to apply. In response, the program administrators instituted a “direct certification” program through which school districts initially enrolled needy students in the program without requiring them to complete the application. Poor children were presumed qualified for the program by default unless shown otherwise – a policy change in the “default rule” that brought over a quarter-million additional poor students into the free lunch program.

Professor Cass Sunstein, Harvard Law School

At a recent Penn Program on Regulation seminar in a crowded Fitts Auditorium at the University of Pennsylvania Law School, Harvard Law School professor Cass Sunstein discussed the relative merits of different ways of presenting choices to people – or what he calls, “choice architecture.” In particular, he analyzed when choice architecture based on default rules is better than “active choosing” without any default settings.

Sunstein concluded that if the choice architects are informed, capable, and trustworthy, then personalized default rules will tend to be the best option. On the other hand, if a population has diverse preferences, likes to choose, or does not trust the choice architect, active choosing will be better.

Sunstein began his talk with an anecdote that showed the power of default rules: apparently 99% of Austrians consent to organ donation, while only 12% of Germans do. The huge disparity between these two neighboring nations is not explained by any cultural differences but instead by the different default rules each country has. Austrians are presumed to enroll in the organ donor program by default; Germans, by contrast, are not enrolled by default but must affirmatively opt in.

The power of default rules can also be seen in the United States. When new employees have to sign up for a retirement savings plans – as opposed to being automatically enrolled when they are first hired – they opt into those plans at a relatively low rate. But when they are presumed to participate but are given a chance to opt out, participation rates are much higher.

The power of these behavioral “nudges” derives from their “stickiness,” says Sunstein. Once put into place, default rules tend to stay in place due to three reasons: inertia, the implicit endorsement of default rules, and loss aversion.

Research shows the role inertia can play. For example, one study from Italy showed that television programs that aired immediately after popular television programs experienced artificially high ratings because people tend to stay with the status quo.

The existence of default rules also may create an implicit endorsement of those rules, Sunstein noted. People often trust the choice architect – the person or entity designing the default rules – and assume that the architect had a valid reason to opt for the default setting.

Finally, the phenomenon of loss aversion amplifies the power of default rules. Professional golfers are more likely to sink putts when they are putting for a par than when they are putting for a birdie, Sunstein said. He also reported that the promise of an additional bonus produces less of a productivity gain by teachers than a threat of rescinding a previously granted bonus.

If default rules are so powerful, how should choice architects use them? Carefully, Sunstein proposed – but also by opting for the choices that would  minimize the cost of errors and the cost of deciding. Based on these two factors, Sunstein explored the relative merits of three types of choice architecture: mass default rules, active choosing, and personalized default rules.

A system based on mass default rules, which sets default settings for an entire population, can increase efficiency in certain settings because it can “nudge” people toward socially optimal behavior. The Affordable Care Act’s individual mandate, Sunstein suggested, makes health care more affordable by lowering the overall risk profile of the pool of insured people. Sunstein also suggested that mass default rules can prove to be “freedom-preserving” because, unlike outright bans, people are still free to opt out of the default setting.

The power of these behavioral “nudges” derives from their “stickiness,” says Sunstein. Once put into place, default rules tend to stay in place due to three reasons: inertia, the implicit endorsement of default rules, and loss aversion.

Research shows the role inertia can play. For example, one study from Italy showed that television programs that aired immediately after popular television programs experienced artificially high ratings because people tend to stay with the status quo.

The existence of default rules also may create an implicit endorsement of those rules, Sunstein noted. People often trust the choice architect – the person or entity designing the default rules – and assume that the architect had a valid reason to opt for the default setting.

Finally, the phenomenon of loss aversion amplifies the power of default rules. Professional golfers are more likely to sink putts when they are putting for a par than when they are putting for a birdie, Sunstein said. He also reported that the promise of an additional bonus produces less of a productivity gain by teachers than a threat of rescinding a previously granted bonus.

If default rules are so powerful, how should choice architects use them? Carefully, Sunstein proposed – but also by opting for the choices that would  minimize the cost of errors and the cost of deciding. Based on these two factors, Sunstein explored the relative merits of three types of choice architecture: mass default rules, active choosing, and personalized default rules.

A system based on mass default rules, which sets default settings for an entire population, can increase efficiency in certain settings because it can “nudge” people toward socially optimal behavior. The Affordable Care Act’s individual mandate, Sunstein suggested, makes health care more affordable by lowering the overall risk profile of the pool of insured people. Sunstein also suggested that mass default rules can prove to be “freedom-preserving” because, unlike outright bans, people are still free to opt out of the default setting.