Smart(er) DefaultsEric J. Johnson

Columbia Business School

Columbia, University

ejj3@columbia.edu

Collaborators

Dan Goldstein

Jonathan Levav

Andreas Hermann

Mark Heitman

Oded Netzer

Olivier Toubia

Defaults Do Matter

In Public Policy: Johnson et al. (1993) Johnson and Goldstein(2003)

In Finance (Madrian and Shea, 2001)

In On-Line Commerce

In Privacy Policies

4.25

27.5

17.1712

99.98 98 99.91 99.997 99.5 99.64

85.9

0

10

20

30

40

50

60

70

80

90

100

Denmark

Netherlands

United

Kingdom

Germany

Austria

Belgium

France

Hungary

Poland

Portugal

Sweden

All Choices Have Defaults

Options:

Benign Defaults: Use what most People would Pick with NoDefault.

But the Default will be ‘Too’ Popular

Nudge Default: Pick what is Best for People

But what is best is not the same for everyone

Mandated Choice: Make people Respond

But decision-making is costly

SOMETIMES, CONSUMERS MAY NOT SAY WHAT IS BEST.

Alternatives

Smart Defaults: Pick what is best for each individual.

Pretty Smart Defaults: Segment then Default.

Adaptive Defaults: Use Early Choices to pick the right default.

Case Study German Large Auto Manufacturer

Auto Configuration

We can see the impact ofdefaults by looking at noDefault choices

Average Car Total withthis choice: €42,948

N=229Mandated

Choice

Case Study Large German Auto Manufacturer

Current Default: The leastexpensive.

Bad Idea:

For the firm: €42,472, aloss of €476 on theengine alone

For consumers: Theydon’t always pick thecheapest.25.6% get adifferent engine

CHEAPESTDEFAULT

Case Study Large German Auto Manufacturer

Better Idea?

For the firm: AverageChoice is €43,251(+€302)

For consumers: Not somuch, 51.2% get aDifferent Engine

BenignDefault

Smart Default

Limited application: Threekinds of engines.

We used characteristics topredict preferences.

Consider Mr. Cheap andMs. Fast.

What is the right default?

A Smarter Idea

Help WantedApplications to Financial Services.

Home Mortgages.

Difficult choice.

Clear demands for betterdecisions

Mortgage Applicationscontain much information

Can Smart Defaults help?

Life Insurance

Buying Life Insurance is an unpleasant decision.

The Correct Amount is relatively easy to calculate.

Should Employers discouraging buying Life insurance?

Alternative: Suggest a ‘smart’ default based on your income,those of your spouse, family size and wealth.

Employers are obvious helpers.

Remember a smart default is a suggestion

401(K): Can Smart Defaults Help?

Strong Evidence that Defaults work

But is a ‘One Size Fits All” Default the Best?

What Could be Done to Improve Defaults? What Variables?

How Much to Save: Age, Self and Spousal Savings,Income.

Where to Save: More Difficult, but Simple Defaults CouldHelp.

Smart(er) Defaults

• Eric J. Johnson

• Columbia Business School

• Columbia, University

• ejj3@columbia.edu