The Default Effect

What it is

In 2001 Brigitte Madrian and Dennis Shea published what happened when one large American company stopped asking new employees whether they wanted to join its pension scheme and began enrolling them automatically, with the option to leave. Participation rose sharply. Nothing else about the plan had changed, not the contributions, not the fund choices, not the tax treatment.

The second finding is the one that matters more and travels less. A large share of the automatically enrolled stayed on the exact default contribution rate and the default fund, a combination almost nobody hired under the old system had chosen for themselves. The authors attribute this to inertia and to employees reading the default as investment advice, as though the company had considered the decision and this was its recommendation.

That second mechanism is what separates defaults from the rest of the behavioural toolkit. A default is the easy path and also a statement about what a reasonable person does.

In effect

Gabriel Carroll, James Choi, David Laibson and Brigitte Madrian later tested the arrangement nobody discusses: requiring new hires to make an explicit choice either way, with no default at all. Active choice raised initial enrolment by twenty-eight percentage points against standard opt-in, producing after three months a savings distribution that the opt-in procedure took thirty months to reach. Their model sets out when each regime wins. Active choice suits situations where people procrastinate heavily and want very different things from one another. Automatic enrolment suits situations where people do not understand the decision they are being asked to make.

The commercial versions are everywhere and rarely announced: the pre-selected shipping option, the renewal that ticks itself, the privacy setting that begins at maximum sharing. Each has an owner with an interest in it being left alone.

What it does not say

It does not say that defaults are neutral conveniences. If people read a default as advice, the default a company sets is a recommendation whether or not it was meant as one.

It does not say that the wider nudge literature is on the same footing. Two reanalyses published in PNAS in July 2022 found no evidence for an overall nudge effect once publication bias is modelled, with evidence against an effect for interventions that supply information or assist follow-through. The category that contains defaults came out undecided rather than refuted, which is a weaker claim than the popular one and a stronger position than most of the field now holds.

It does not say that opt-out policies are a one-way gain. The organ donation evidence, the best known application, is genuinely mixed once living donation is counted.

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