Strong Antecedent Preferences
To see why default rules may be ineffective, begin with the case of marital names.5 When people marry, all states in the United States have the same default rule: both men and women retain their premarriage surnames. In the overwhelming majority of cases, American men do stick with the default. Relatively few men change their names. By contrast, the overwhelming majority of American women do change their name—for college graduates, eighty percent.6 In that respect, the default rule seems to have relatively little impact on women. To be sure, the percentage of women who change their names might be even higher if they were defaulted into doing so. Nonetheless, it is revealing that most married women in the United States reject the default.
Why doesn’t the default rule stick for American women? Four factors seem to be important. First and most important, many women strongly want to change their names, and their desire is not unclear. This is not a complex or unfamiliar area in which the default rule helps to construct people’s preferences, in which people have vague or ambiguous preferences, or in which people have to work to ascertain their preferences. True, many women are undoubtedly affected by social norms, which some of them may wish to be otherwise; but with those norms in place, their preference is not unclear. When a social norm is strong, it may overwhelm the effect of the legal default rule; in fact, it might operate as the functional equivalent of such a rule—a point with general implications.7
Second, the issue is highly salient to married women. It is not exactly in the background. Because marriage is a defined and defining event, the timing of the required action is relatively clear. Procrastination and inertia are therefore less important; the effort tax is well worth incurring.
Third, the change of name is, for some or many of those who do it, a kind of celebration. It is not the sort of activity that most women seek to defer or see as an obligation or as a way of helping their future selves. If people affirmatively like to choose—if choosing is fun or meaningful—a supposed effort tax from the default rule is nothing of the sort. Its sign changes; it may even be a kind of effort subsidy. Sometimes choosing is a benefit rather than a burden.
Fourth, keeping one’s name can impose costs, especially (but not only) if one has children. If a wife has a different name from her husband, or vice versa, it might be necessary to offer explanations and to dispel confusion. With some private and public institutions, offering those explanations might be burdensome and time-consuming. For some women, life is made more difficult if they do not have the same name as their husband. Social practices thus create a strong incentive to overcome the default. (To be sure, those practices are shifting, at least in some nations.) When the relevant conditions are met—strong preferences, clear timing, positive feelings about opt in, and greater ease and simplicity from opt in—the default rule is unlikely to matter much.
For present purposes, the central point is that strong preferences are likely to be sufficient to ensure that the default rule will not stick. In such cases, inertia will be overcome. People will not be much moved by any suggestion that might be reflected in the default rule (and in the particular context of marital names, the default probably offers no such suggestion). Loss aversion will be far less relevant, in part because the clear preference and accompanying social norms, rather than the default rule, define the reference point from which losses are measured.
Consider four other examples, reflecting the importance of strong antecedent preferences:
1. A study in the United Kingdom found that most people opted out of a savings plan with an unusually high default contribution rate (12 percent of pretax income).8 Only about 25 percent of employees remained at that rate after a year, whereas about 60 percent of employees shifted to a lower contribution rate. The default contribution rate was not entirely ineffective (25 percent is a large number), but it was far less effective than it would have been if the savings plan had a default contribution rate that fit more closely with people’s preferences.
2. Many workers opt out if a significant fraction of their tax refund is defaulted into US savings bonds. In large numbers, they reject the default, apparently because they have definite plans to spend their refunds and do not have much interest in putting their tax refunds into savings bonds.9 Their preferences are strong, and they predate the default rule.
3. Consistent with the standard finding of the effectiveness of defaults, a change in the default thermostat setting had a major effect on employees at the Organization for Economic Cooperation and Development (OECD).10 During winter, a 1°C decrease in the default caused a significant reduction in the average setting. But when choice architects reduced the default setting by 2°C, the reduction in the average setting was actually smaller, apparently because sufficient numbers of employees thought that it was too cold and returned the setting to the one that they preferred. In the face of clear discomfort, inertia is overcome. From this finding, we might venture the following hypothesis, taken very broadly: People will be inclined to change a default rule if it makes them uncomfortably cold. To be sure, strong social norms or feelings of conscience11 might counteract that effect—but they will have to be quite strong.
4. A great deal of work shows that the placement of food in cafeterias and grocery stores can have a large effect on what people choose. But there are limits to how much the placement of food can influence choices.12 Rene A. de Wijk et al. sought to increase consumption of whole-grain bread, which is generally healthier than other kinds of bread. For several weeks, they placed the whole-grain bread at the entrance to the bread aisle—the most visible location. And for different weeks, they placed it at the aisle’s exit (the least visible location).
The behavioral prediction is that when whole-grain bread is more visible, more people will buy it. But there was no such effect. Whole grain accounted for about one-third of the bread sold—and it did not matter whether it was encountered first or last. As the authors suggest, the best explanation for their finding is that people know what bread they like, and they will choose it, whatever the architecture of the supermarket. Strong antecedent preferences trump the effect of the default rule. Note too the finding that while school children could well be nudged (through the functional equivalent of default rules) into healthier choices, researchers were not able to counteract the children’s strong preference for (unhealthy) French fries.13
In all of these cases, it is a useful oversimplification to hypothesize that choosers are making a rational decision about whether to depart from a default based on the costs of decisions and the costs of errors. When a preference does not exist at all, or when it is weak, choosers will accept the default rule or decline to focus on it; attention is a limited resource, and people ought not to use it when they have no reason to do so. When a preference does not exist at all, or when it is weak, the informational signal contained in the default rule justifiably carries weight. But when choosers have a strong contrary preference, the cost of making the relevant decision is lower (because people already know what they think), and the cost of sticking with the default is higher (because people know that it points them in the wrong direction).
Any such analysis of costs and benefits is often intuitive and automatic rather than deliberative and reflective, and it might well involve heuristics and biases. For many choosers, inertia might well have more force than it should on the basis of a fully rational weighing of costs and benefits. Moreover, recent events in someone’s life—involving, for example, a lack of available income in a certain period or a bad experience with a certain food—might trigger the availability heuristic and lead people wrongly to reject a default or any kind of choice architecture. The point is not that the decision to reject a default reflects an accurate calculation but that people may make either an intuitive (and fast) or a deliberative (and slow) judgment about whether to reject nudges.
Counternudges
Suppose that self-interested actors have a strong incentive to convince peopl
e (say, their customers) to opt in or out. If so, they might be able to take effective steps to achieve their goals. They might be able to persuade people to choose and thus to overcome the default, rendering it ineffective.14 They undertake effective counternudges.
Consider the regulatory effort in 2010 by the Federal Reserve Board to protect consumers from high bank overdraft fees.15 To provide that protection, the board did not impose any mandate but instead regulated the default rule. It said that banks could not automatically enroll people in overdraft “protection” programs; instead, customers had to sign up. More particularly, the board’s regulation forbids banks from charging a fee for overdrafts from checking accounts unless the accountholder has explicitly enrolled in the bank’s overdraft program.16 One of the goals of the nonenrollment default rule is to protect customers, and especially low-income customers, from taking the equivalent of extraordinarily high-interest loans—indeed, loans with interest rates of up to 7,000 percent. The central idea is that many people end up paying large fees essentially by inadvertence. If the default rule is switched so that consumers end up in the program only if they really want to be, then they will benefit from a safeguard against excessive charges.
In principle, the regulation should have had a very large effect, and indeed, an understanding of the power of default rules helped to motivate its promulgation. The board explicitly observed that “studies have suggested consumers are likely to adhere to the established default rule, that is, the outcome that would apply if the consumer takes no action.” The board also referred to research on the power of automatic enrollment to increase participation in retirement savings plans. It emphasized the phenomenon of unrealistic optimism, suggesting that consumers might well think, unrealistically, that they would not overdraw their accounts. No one argues that a default rule can entirely cure the problem of unrealistic optimism, but it can provide a remedy against its most serious harmful effects, at least if the default is sticky.
As Lauren Willis shows in an important article,17 the effect of the regulation has not been nearly as large as might have been expected. The reason is that people are opting into the program, and thus rejecting the nonenrollment default, in large numbers. The precise figures remain unclear, but the overall level of opt in seems to be around 15 percent, and at some banks it is as high as 60 percent. Here is the most striking finding: among people who exceed the amount in their checking account more than ten times per month, the level appears to be over 50 percent.
A central reason is that many banks want to be able to charge overdraft fees and hence use a number of behaviorally informed strategies to facilitate opt in. For those who believe that opting in is a bad idea for many or most customers, this is a clear case of self-interested exploitation of behavioral findings. As Willis demonstrates, they have taken steps to make opt in as easy as possible—for example, simply by pushing a button on an ATM. They have also engaged in active marketing and created economic incentives to persuade people to opt in. They have cleverly exploited people’s belief, which is often inaccurate, that it is costly not to be enrolled in the program. For example, they have sent materials explaining, “You can protect yourself from … fees normally charged to you by merchants for returned items,” and “The Bounce Overdraft Program was designed to protect you from the cost … of having your transactions denied.” They have sent their customers a great deal of material to persuade them that enrollment is in their economic interest.
Consider the following excerpt from one bank’s marketing materials, explicitly exploiting loss aversion:
Yes: Keep my account working the same with Shareplus ATM and debit card overdraft coverage.
No: Change my account to remove Shareplus ATM and debit card overdraft coverage.18
There is a large contrast here with the retirement context, in which providers enthusiastically endorse automatic enrollment and have no interest in getting people to opt out. Those who run retirement plans are quite happy if more people are participating, and hence they are glad to work with employers, or the government, to promote enrollment. By contrast, the Federal Reserve Board called for a default that banks dislike, and at least to some extent, the banks have had their revenge. In the savings context, the default rule would not be nearly as sticky if providers wanted people to opt out.
From this illuminating tale, we can draw a general lesson, which is that if regulated institutions are strongly opposed to the default rule and have easy access to their customers, they may well be able to use a variety of strategies, including behavioral ones, to encourage people to move in the institution’s preferred directions—and thus to abandon the default. In such cases, the default is ineffective not because choosers independently dislike it but because companies and firms convince them to choose to reject it. Here too it is useful to see people as making a slow or fast judgment about costs of decisions and the costs of errors, with the important twist that the targets of the default (for the most part, affected companies) work to decrease the (actual and perceived) costs of decisions and to increase the perceived costs of errors in order to render the nudge ineffective.
Consider the domain of privacy, in which many people also favor a particular default rule, one that will safeguard privacy unless people voluntarily choose to give it up.19 If companies want people to relinquish privacy, they might well be able to convince them to do so—perhaps by using tactics akin to those of financial institutions in the Federal Reserve case, perhaps by denying people services or website access unless they waive their privacy rights.20 Willis herself gives the example of the Netherlands, which created a “don’t-track-me” default. As she explains, “virtually all firms (and even nonprofits) responded to the law by requiring consumers to opt out as a condition of using the firm’s website, not by competing on promises not to track.”21
The general point is plain: When default rules or other forms of choice architecture are ineffective, it is often because self-interested actors (e.g., cigarette companies) have the incentive and the opportunity to impose some kind of counternudge, leading people to choose in their preferred way.
What Should Be Done?
If a default rule proves ineffective, there are three possible responses. The first is to rest content on the ground that freedom worked. The second is to learn from the failure and to try a different kind of nudge, with continuing testing. The third is to take stronger measures—counter-counternudges, or even mandates and bans—on the ground that freedom caused a problem.
As we have seen, evaluation of these responses depends on normative considerations; the fact that a nudge has proved ineffective does not, by itself, tell us what else should be done. If a nudge has failed, we might conclude that on welfare grounds, nothing is amiss; people are going their own way, and perhaps that is fine. But many nudges are not controversial. They might be designed to encourage people to take very low-cost steps to improve their lives, and if they fail, people’s lives will be worse. If choice architects have good reason to think that people’s choices are not promoting their welfare, it is worth considering alternatives. And if the interests of third parties are at stake, the ineffectiveness of nudging may be a reason to consider mandates and bans (see chapter 10).
One clarification before we begin: It is important to consider the possibility of diverse responses within the affected population, and the aggregate effect may tell us far less than we need to know. Some nudges that seem ineffective overall might turn out to be have large effects on distinct subpopulations, during distinct time periods, or in specific contexts. Suppose, for example, that calorie labels have little or no effect on a large population. Even if this is so, it might be effective, in a relevant sense, if it has a significant impact on people with serious weight problems.
Or suppose that 40 percent of people opt out of a default rule—say, a rule calling for enrollment in pension or wellness plans. Those who opt out may be precisely the group that ought to opt out, given their preferences and situations; for e
xample, young people who need money this month or this year might rationally opt out of a pension plan. Alternatively, the aggregate numbers may disguise a serious problem, as when the population that is unaffected by a nudge (say, by a warning or a reminder) includes those who would most benefit from it.
Freedom Worked
Suppose that default rules fail to stick because people do not like them. In such cases, the fact that they are mere defaults, rather than mandates, might be both good and important. Any default rule might be ill-chosen or might not fit individual circumstances. If so, the fact that people can reject it is a valuable safeguard. In the case of very large default contribution rates, that claim seems quite plausible. Or consider a situation in which an institute adopts a default rule in favor of double-sided printing and many people switch to single-sided: if the latter fits their situations, there is no problem.
Something similar might well be said if and when self-interested institutions that are burdened by a default rule use counternudges to convince people to reject it. The tale of overdraft protection seems to be one of regulatory failure or at least of incomplete success, but things are not so clear. Recall that many people (perhaps as high as 85 percent) do not opt in to the program. Recall too that the largest proportion of people who do opt in are those who go over their checking limits. For such people, it is not implausible to think that opt in is a good idea. At least some of them, or perhaps the majority, might well be rational to make that choice. If they cannot borrow from their bank—and overdraft protection is a form of borrowing—they might have to borrow from someone else, which would mean a level of inconvenience and at least potentially even higher interest rates. If so, many people might have to resort to payday lenders, whose rates may or may not be lower.
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