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Home / Investing basics / Psychology of Investing / Active choice making and defaults

Behaviour

Active choice making and defaults

2 min read

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Defaults

Defaults have a powerful effect on behaviour because we are most likely to choose the option provided. For example, far more people are organ donors in countries where people are donors by default than in countries where people need to choose to be a donor.

Financial decisions making is complex and people are often faced with an overwhelming number of optionsOptions An investment that gives you the right to buy or sell it at a set…+ read full definition. Defaults can be used to reduce the complexity and help people make better decisions with their money. A prominent example of defaults comes from behavioural economist Richard Thaler. Thaler suggested that a firm change their employee retirement savings plan so that annual contributions increased by default. This led to a nearly 300% increase in savings rate. One small change can have a significant, positive impact on behaviour, especially in situations where the default behaviour – our inertia – is to not save or investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition.

Active choice

Of course, there may be other situations where what would be desirable or preferable is not so clear—and where a default option may not be so clear. In cases like this, offering people active choice by removing the default might be a better option. Some research on program uptake and prescription renewals suggest that active choice making may have a stronger effect on behaviour than defaults because the former may nudge people to slow down and reflect on the importance of the choice, and create a greater sense of loss aversion (for not choosing), and perhaps a greater sense of responsibility to follow through.

When it comes to your investments and financial situation, even if the default option seems to be in your best interest, it’s a good idea to still review the alternatives before making a decision.

Last updated August 11, 2023

Articles in this section

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Behavioural insights: How to counteract your biases to make better decisions 9 min read
Loss aversion: Why people are so afraid of losing money 4 min read
Confirmation bias: A fundamental risk to your investing decisions 4 min read
Anchoring effect: How meaningless information can affect your financial decisions 5 min read
Herd behaviour: When following the crowd isn't in your best interest 4 min read
How overconfidence bias may affect your financial decisions 4 min read
Behavioural insights and fraud 3 min read
Active choice making and defaults 2 min read
Mental accounting 3 min read
Familiarity bias 2 min read
Inertia 2 min read

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