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Defaults, choice architecture, and choice overloadDan GoldsteinAssistant Professor of MarketingLondon Business School

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Classical View:–Diagnosis: People do not derive enough value from organ donation.–Treatment: Increase incentives.

Psychology / Behavioral Economics:–Diagnosis: People do not know whether they want to donate organs,

they generate an answer when asked.–Treatment:

–Realize this is an unpleasant question and that there is a cost in

making a decision.–Ask questions in a way that gives the answer most people would if

they thought about it at length.

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Organ Donation

Johnson & Goldstein, 2003

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Constructed preferences

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Donation rates per million–Years 1991-2001–Presumed vs. Explicit Consent

Controls–Transplant Centers per million–Percent post-secondary education–Percent Roman Catholic

Result: Defaults produce a 16%

(Johnson and Goldstein), 25-30% (Abadie

and Gay) to 50% (Gimble et al.) increase

in donations.

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The case for consumer protection

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Opt-out privacy

+ $40 Million

With seat reservationWithout seat reservation

With seat reservationWithout seat reservation

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+ $2 Billion

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•Effort / Inattention•Loss Aversion / Endowment Effect•Perceived Majority Preference•Perceived Recommendation

Possible Causes of Default Effects

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Recommendations

People are asked to choose investment funds and allocate money to them.

___________

___________

___________

___________

To select more funds click here

________________________________________________________________________________________

“Heuristics and Biases in Retirement Savings Behavior,” Benartzi and Thaler (2006)

Small form Big form

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0

5

10

15

20

25

30

35

40

45

Small form Big form

Per

cen

t C

ho

osi

ng

mo

re t

han

4 f

un

ds

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Positive influences of defaults

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Choice of “Green” Energy in a European City

0%

10%

20%

30%

40%

50%

60%

70%

80%

Before Green Default After Green Default

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In a firm where new employees save nothing towards their pension as a default …

… 70% of employees savednothing towards their own pension.

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Contribution levels when the default is 3%

0%

10%

20%

30%

40%

50%

60%

70%

0 1-2% 3% 4-5% 6% 7-10% 11-15%

Contribution Level

Perc

en

tag

e o

f E

mp

loyees

From “The Importance of Default Options for Retirement Saving Outcomes: Evidence from the United States” by Beshears, Choi, Laibson & Madrian. Available online.

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Save More Tomorrow

0

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Pre-advice First raise Second raise Third raise Fourth raise

Co

ntr

ibu

tio

n r

ate

Benartzi and Thaler, 2007

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Policies for setting defaults

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Rules for setting defaults

• Mass defaults

• Benign defaults

• Random defaults

• Hidden options

• Forced choice

• Personalized defaults

• Persistent defaults

• Smart defaults

• Adaptive defaults