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 price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ 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 involves risk.+ read full definition.
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.