Defaults and Cognitive Effort

Abstract

We explore experimentally a cognitive-effort channel through which defaults might influence behavior in an insurance market setting where there is uncertainty in the benefits offered by different potential plans. We find that defaults can strongly influence purchasing behavior when participants can make decisions at their own pace and we document a positive correlation between the time subjects spend making a decision and the probability that they adjust away from the offered default. By contrast, we observe no significant impact of defaults in a treatment where we fix the decision time so that participants must spend 45 seconds on each decision screen without the possibility of moving faster. Our fixed-deliberation manipulation lowers the opportunity cost of decision time and suggests that defaults operate by influencing decisions of individuals who find the cognitive costs of active decision-making prohibitively high.

Keywords: default effect, cognitive costs, cognitive-effort channel, insurance, experiment

JEL Classification: C91, D91, G22