When Nudges Fail: Slippery Defaults
76 Pages Posted: 7 Sep 2012 Last revised: 5 Jun 2014
Date Written: September 6, 2012
The Korean language version of this paper can be found at http://ssrn.com/abstract=2445107
Inspired by the success of “automatic enrollment” in increasing participation in defined contribution retirement savings plans, policymakers have put similar policy defaults in place in a variety of other contexts, from checking account overdraft coverage to home mortgage escrows. Internet privacy appears poised to be the next arena. But how broadly applicable are the results obtained in the retirement savings context? Evidence from other contexts indicates two problems with this approach: the defaults put in place by the law are not particularly sticky, and the people who opt out can be those who would benefit the most from the default. Examining the new default for consumer checking account overdraft coverage reveals that firms can systematically undermine each of the mechanisms that might otherwise operate to make defaults sticky. Comparing the retirement savings default to the overdraft default, four boundary conditions on the use of defaults as a policy tool are apparent: policy defaults will not be sticky when (1) motivated firms oppose them, (2) these firms have access to the consumer, (3) consumers find the decision environment confusing, and (4) consumer preferences are uncertain. Due to Constitutional and institutional constraints, government regulation of the libertarian paternalism variety is unlikely to be capable of overcoming these bounds. Therefore, policy defaults intended to protect individuals when firms have the motivation and means to move consumers out of the default are unlikely to be effective unless accompanied by substantive regulation. Moreover, the same is likely to be true of “nudges” more generally, when motivated firms oppose them.
Keywords: Law and Economics, Consumer Protection, Contract Law, Behavioral Economics, Behavioral Finance, Government Regulation of Financial Institutions
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