Opt In or Opt Out: The Power of the Default Option

I read a great article on New York Times last week, Unnatural Selections. The author, Mr. Barry Schwartz is a professor of psychology at Swarthmore College. He wrote about the power of the default option.

People tend to stay with the default option presented to them because deviating from the default option requires making a decision. People are afraid of making a wrong decision, especially when they are unfamiliar with the subject. So they have the decision made for them by doing nothing.

You’ve got to read the article. The included cartoon is very funny. Barry Schwartz is the author of the book The Paradox of Choice: Why More Is Less. I placed a hold on his book from my public library. It should be an interesting read.

I heard from people who administer my company’s Employee Stock Purchase Plan (ESPP) that the participation rate is less than 50%. It came as a shocker to me. One of my first blog posts was Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal. ESPP participants earn a minimum 90% annualized return on their money with almost zero chance of loss. Yet more than half of the eligible employees in my company don’t participate. Why? Because it requires an opt-in. Employees have to make a decision to enroll. When they don’t understand it, they don’t bother spending the time trying to understand it. Instead they do nothing.

On second thought I guess it shouldn’t be so shocking because there are people who don’t participate in their 401(k) plan even when their employer matches their contributions.

The local telephone company in my area offers an unlimited local calls service as their default option, but there’s also a measured rate service that comes with 300 minutes of local calls a month and costs 1/2 of the price of the unlimited service. I suspect that a lot of people don’t make more than 300 minutes of local calls a month but they are paying for the unlimited service month after month simply because it was the default option when they set up their phone service many years ago.

Businesses know about the power of the default option. They select it very carefully in order to influence your decision making. Is it a surprise that most people choose the 3-out plan from Netflix? As a consumer, you have to recognize that the default option thrown at you is not necessarily in your best interest. Don’t just blindly follow the default option, especially if the default is doing nothing.