A video explaining Default Effect by Rolf Dobelli the author of The Art of Thinking Clearly on the IDFC Mutual Fund Youtube Channel.
What is Default Effect? And why you go with the status quo
In a restaurant the other day I scanned the wine list in desperation. Irouléguy? Harslevelü? Susumaniello? I’m far from an expert, but I could tell that a sommelier was trying to prove his worldliness with these selections. On the last page, I found redemption:
‘Our French house wine: Réserve du Patron, Bourgogne, $52’.
I ordered it right away; it couldn’t be that bad, I reasoned.
I’ve owned an iPhone for several years now. The gadget allows me to customise everything – data usage, app synchronisation, phone encryption, even how loud I want the camera shutter to sound. How many of these have I set up so far? You guessed it: not one.
In my defence, I’m not technically challenged. Rather, I’m just another victim of the so-called default effect. The default setting is as warm and welcoming as a soft pillow into which we happily collapse. Just as I tend to stick with the house wine and factory cellphone settings, most people cling to the standard options.
Here’s an example
New cars are often advertised in a certain colour; in every catalogue, video and ad, you see the new car in the same colour, although the car is available in a myriad of colours. The percentage of buyers who select this default colour far exceeds the percentage of car buyers who bought this particular colour in the past. Many opt for the default.
Another Example: How a government can direct its citizens without unconstitutionally restricting their freedom
In their book, Nudge, economist Richard Thaler and law professor Cass Sunstein illustrate how a government can direct its citizens without unconstitutionally restricting their freedom. The authorities simply need to provide a few options – always including a default choice for indecisive individuals.
This is how New Jersey and Pennsylvania presented two car-insurance policies to their inhabitants.
The first policy was cheaper but waived certain rights to compensation should an accident take place. New Jersey advertised this as the standard option and most people were happy to take it.
In Pennsylvania, however, the second, more expensive option was touted as the standard and promptly became the best-seller. This outcome is quite remarkable, especially when you consider that the two states’ drivers cannot differ all that much in what they want covered, nor in what they want to pay.
Or consider this experiment
There is a shortage of organ donors. Only about 40% of people opt for it. Scientists Eric Johnson and Dan Goldstein asked people whether, in the event of death, they wanted to actively opt-out of organ donation. Making donation the default option increased take-up from 40% to more than 80% of participants, a huge difference between an opt-in and an opt-out default.
The default effect is at work even when no standard option is mentioned.
In such cases we make our past the default setting, thereby prolonging and sanctifying the status quo. People crave what they know. Given the choice of trying something new or sticking to the tried and tested option, we tend to be highly conservative even if a change would be beneficial. My bank, for example, charges an annual fee of $60 for mailing out account statements. I could save myself this amount if I downloaded the statements online. However, though the pricey (and paper-guzzling) service has bothered me for years, I still can’t bring myself to get rid of it once and for all.
So where does the status-quo bias come from?
In addition to sheer convenience, loss aversion plays a role. Recall that losses upset us twice as much as similar gains please us.
For this reason, tasks such as renegotiating existing contracts prove very difficult. Regardless of whether these are private or professional, each concession you make weighs twice as heavy as any you receive, so such exchanges end up feeling like net losses.
Both the default effect and the status-quo bias reveal that we have a strong tendency to cling to the way things are, even if this puts us at a disadvantage. By changing the default setting, you can change human behaviour.
‘Maybe we live our lives according to some grand hidden default idea,’
I suggested to a dinner companion, hoping to draw him into a deep philosophical discussion.
‘Maybe it just needs a little time to develop,’
he said after trying the Réserve du Patron.
The above article is from the book The Art of Thinking Clearly by Rolf Dobelli. The article is only for educational and informative purposes to explain and understand cognitive biases. It is a great book, definitely worth a read!