Defaults are not always the silver bullet

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Defaults are sometimes considered the poster child of behavioural science because they are one of the surest ways of changing people’s behaviour.

The concept of creating a default option or changing the default option is one of the most powerful nudges in any behavioural scientist’s toolbox; the idea that when people are presented with a predetermined default option, or are automatically enrolled, they tend to accept it. Examples range from default passwords (few ever change their Wi-Fi password) and browsers, to standard insurance packages.

We accept the status quo and go with the flow, without considering other options or investigating further, often because we see the default as an implicit recommendation, either because it’s the option most people would choose or it’s the option suggested by experts.

Broadly, behavioural scientists have found that default settings are likely to be most effective when:

• The default is seen as an implicit recommendation
• The decision is complex and unfamiliar
• The individual does not have a clear preference for any option
• The decision is dull or not seen as worth the effort.

One of the most well-known applications of defaults is enrolling people into pensions. Here, employees are automatically opted into a scheme by their employer, although they can always opt out if they choose. Research conducted in the US by behavioural economists Brigitte Madrian and Dennis Shea found that auto-enrolling employees into a retirement savings scheme raised enrolment from 49% to 86%.

Yet, researchers have now identified contexts where defaults that initially appeared to be a good solution to changing behaviour ultimately backfired because they were overly ambitious, triggering consumers to override the default. Defaults that try to stretch consumer behaviour too far in one direction may have a negative impact on behaviour as consumers revert to their original behaviour, or even beyond.

Three topical examples illustrate why defaults may not always be the behavioural change silver bullet:

Energy

Households prefer a home that is warmer than the default temperature on smart thermostats. In this cost-of-living/energy crisis era, we’re often told that we can save energy by turning down the thermostat. Smart thermostats such as Nest and Hive market themselves on this by highlighting how consumers can save as much as 20% on energy costs by learning and adopting new household behaviours, and recommending optimal heating temperatures usually lower than societal norms.

However, a study by behavioural scientists Robert Metcalfe, John List and colleagues found Californian households over-rode their smart thermostat’s programmed temperature settings so frequently that they failed to make the energy savings predicted. Most households initially programmed their thermostats to the default recommended levels, but over-rode these settings once or twice a day, particularly in the early morning or evening. The default temperatures seemed to be too low or too high for households, meaning any gains were more than cancelled out.

Account overdrafts

People who regularly access unarranged overdrafts prefer to opt out of policies that protect them from high overdraft fees. Bank charges for overdrafts on current accounts cost consumers billions; in 2016, UK financial firms gained £2.3bn in revenue from overdraft fees. Most of the revenue comes from unarranged overdrafts, which are used by 14% of consumers. While some people find it a source of convenient, if expensive, credit, others don’t intend to use it and go into the red by accident.

The situation is similar in the US and, in 2010, the government decided to tackle the problem. It implemented a policy stipulating that banks could not automatically charge fees for unarranged overdrafts by default unless customers had opted out. Any debit card purchases that would push checking account balances into the red would be declined. Policymakers assumed that customers would prefer to stick to the default, yet, in reality, many people opted out, especially people with the highest tendency to use overdraft facilities. Among people who used unarranged overdrafts more than 10 times per month, more than 50% of them opted out. One factor at play was that consumers tended to be over-optimistic about their ability to stay in the black, opting out even though they had previously taken advantage of overdraft facilities. Many simply preferred the convenience of easy credit, even at high cost.

A better solution might be a default alert. In the UK, customers are alerted by simple automatic reminders as soon as they access an unarranged overdraft. In a recent trial by the Financial Conduct Authority, those who received an automatic alert when they strayed into the red paid fewer charges than those who received no alerts, because the alert often prompted customers to take immediate action to get back into the black.

Pensions

People prefer to pay less than the default rate into their pension if it is set too high.

Finding the optimal ‘sweet spot’ rate at which to set a default pension contribution is difficult. Once enrolled in a pension, many programmes, including those in the UK, set a default minimum contribution rate that people must save each month. Set too low and people won’t have enough to retire on; set too high and people will find it so painful to lose so much of their income that they may opt out of a pension entirely.

One trial of different UK pension contribution rates found that only 25% of employees accepted a default savings rate of 12% – the level recommended by experts, but relatively high compared with current contribution rates. Median take-home pay per month was around £2,650 in 2021, so 12% would mean paying more than £300 into your pension per month, a figure that many would baulk at, especially right now. In the trial, 60% of employees shifted down to a lower contribution rate. By setting the default rate too high, people may end up saving less than if the default rate had been more modest.

Implications:

• Default options are powerful tools for quickly changing behaviour – as long as they are applied in the right context.
• If implemented too ambitiously, such as default savings rates or home temperature settings, they may impact in the wrong direction, and people’s choices and decisions may boomerang.
• To avoid this boomerang effect, it pays to explore consumer preferences: what do they like and not like; how do they behave in different contexts; how do they organise their finances, their healthcare, their home life?
• As learning evolves around these core behavioural science concepts, it is the nuance of understanding that makes them even more powerful.

Hollingworth is co-founder at The Behavioural Architects. This article was first published in Impact.