Decisions Have An Opportunity Cost That Require Tradeoffs

The Market System: Defaults and Decisions

Jul 18, 2013 • Uncategorized • 214 Views    No Comments

  • Coffee: At Starbucks, I order a Grande West Java Black Eye Clover in a Vente cup. My drink requires 4 decisions.
  • Software: Downloading software, don’t you just check the default package rather than selecting from a customized list of alternatives?
  • Kidneys: In Austria the organ donation rate is 99.9% while Germany’s is close to 12%. The reason might be that Austria’s default is “yes.” In Germany, you have to submit your consent to become a donor.
  • Cars: Planning a new car purchase, I talked with the salesman about my options. Sound system, heated steering wheel, paint color…on and on. Long before we finished I was exhausted, bored and ready to accept a default package.

At the University of Pennsylvania, Harvard law professor Cass Sunstein explained that we gravitate to defaults because they simplify our lives. In his book Nudge, he adds that many people believe the default must be beneficial because it is the default. Furthermore, people get decision fatigue and select the “yeah, whatever” choice because the default is almost like “doing nothing.”

For health insurance, might an Affordable Health Care Act default encourage cost savings or should better health care be the default? With consumer financial protection, would the right kind of default mortgage prevent a new housing bubble?

And finally, should we let default options affect markets? After all, default options are decision “nudges” that shape demand and supply in a market system. No longer do we have millions of consumers and producers in markets like health insurance and mortgages independently affecting equilibrium.

When do you support adding default options?

Sources and resources: These comments on the Cass Sunstein Penn talk convey a brief overview of his opinion of default options while he discusses them much more extensively in Nudge. On the same topic, but from a slightly different perspective, econlife based a post on decision fatigue on a John Tierney NY Times article.

Related Posts

« »