426. Defaults Uncovered: The Hidden Influences on Our Choices (Refreshed Episode)

Welcome to episode 426 of the Brainy Business Understanding the Psychology of why People.

Buy Today's episode is all about defaults. Ready? Let's get started.

You are listening to the Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now here's your host, Melina Palmer.

Hello.

Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast.

Today's episode is all about defaults.

I've refreshed this one today, which was originally episode 20 of the podcast and came out way back in November of 2018 because of my conversation with Nobel laureate Bob Lefkowitz, which is coming out this upcoming Friday. So why did defaults come to mind? A few reasons. First, he won the Nobel Prize in Chemistry and is a medical doctor and researcher in profession. The default might say he isn't a.

Fit for a show in behavioral economics.

Being applied into business, but there's a ton of crossover when you take the time to look for it and don't just accept the way things have always been done. His approach to problem solving and working with patients also didn't just accept the default answer or diagnosis, which shows the power of asking great questions and not just accepting the default as you find it or the status quo.

So I felt it was a good.

Time to think about the default, both in understanding what it is and knowing how it is impacting you personally and those you're selling to. As a lead in to that conversation coming out in a couple of days. Don't forget that there are links for everything, including my top related past episodes and books waiting for you in the.

Show Notes for this episode which are.

Found within the app you're listening to and@the brainybusiness.com 426 all right, let's talk about defaults.

Because this is a reasonably common term, you probably think you already know all there is to know about defaults. You know what a default is and presumably you know how they impact you, right? Oh no, no no no, no. As I said at the top of the episode, I'm going to blow your mind here today, which I've sort of gotten in the habit of doing. So hopefully I blow your mind a little bit every episode, but this should be a fun one too. You probably don't realize it, but defaults are everywhere. And seriously, I mean everywhere. Sure, there are default settings when you install software and I'm going to get into more detail on that later in the episode. But what about every other choice you make? Basically every choice has a default. Think of the default as what happens if you do nothing or if your customer does nothing. This is the default choice. More often than not, when presented with a series of options, people will go with the default, whether this is a pre selected option or the doing nothing and not choosing anything. This gets combined with something called step status quo bias, which I talked about in episode seven on change management. I've also re linked to the article on the Endowment effect, loss aversion and status quo bias which I discussed in that episode, but know that there will be a future episode dedicated specifically to status quo bias. Essentially, people are more likely to keep things the way they are, maintaining the status quo and not take an action to change things. Which means defaults, which are what happen if you do nothing, are more likely to be chosen whether they're good for you or not. And even if someone does not make an active choice or realize all the consequences of their action or inaction, they are still essentially making a choice. The choice to do nothing and go with the default is still a choice. For that reason, in business, when you are presenting options, it is critical that you consider what the default is and what is going to be the most likely choice. This is getting into choice architecture, which is going to be the focus of a series of episodes later on, which I've already mentioned before, for it's really complex and definitely includes defaults, which is why we're starting here. I did have I had an entire class dedicated to this topic of choice architecture, if that helps you to understand how robust the topic is. It's fascinating and amazing and again, defaults really tie into that. But defaults are the way our brains really can showcase just how lazy they are. This is where all the shoulds of the world come to die. Status Quo Bias and defaults sure, everyone should put enough money into retirement to be able to sustain them when they stop working someday. Everyone would likely agree that they would like to finish working eventually and be able to enjoy a retirement where they can live better than they did as a poor college student, or not have to live in a cardboard box. But does everyone put enough money away? Of course not. One big influencer of this is defaults. You may be thinking to yourself, come on Melina, what does retirement saving have to do with defaults? The truth is a lot, and there's a ton of research into this. Do me a favor, imagine you are in the HR department and it's Your job to choose a default option for a retirement plan. You have several choices and I'm going to just outline three of them for you here. Option one, you can make it so every year people need to opt in and make a new choice for how much to put into retirement. If they do nothing, the default will be zero, regardless of what they did the year before. After all, who's to say they have the same financial situation this year as previously? Maybe they don't want to be locked in and given the choice, they could opt to put more in. Right? Okay. Option two. You make it so every year people are automatically going to put in what they did the year before, but they have the option to change if they want. This is good because people should be watching what they do. There's that word again. Should. And knowing how status quo bias works, we what happens if someone stays in the same job from the time that they're 18 years old if they selected to do no allocation or a very small percentage when they did not have the means, and now they've been in a job for 20 years and have never made a change? Hmm, that wouldn't be good. So let's look at option three. You give people the ability to opt into a program where every year when they get a raise, a portion of that will raise is going to be automatically put toward retirement. The default is they will be increasing their contribution unless they choose to do otherwise. So which do you choose? How do you choose? Let's break it down a little further. Options one and two leave defaults that are consistent with past behavior instead of considering the future, which is a problem for the human brain. That's time discounting at work. And I promise that episode's coming soon. As you now know, people will opt for the status quo even if they have good intentions. One study found that 86% of people who said they were planning to change their retirement allocations in the next few months had done absolutely nothing four months later. Would they have benefited from a better default? Studies say yes. Richard Thaler, the Nobel Laureate, did a study called Save More tomorrow back in 2001, which took the approach outlined in option three. You have people commit when they're in a cold state to pledge some of their future earnings to retirement. It's an easy commitment for the brain to make. Because of that time discounting I just mentioned, and because of status quo bias and this now becoming the default, they're less likely to opt out than they would be to opt in, even though they know it's in their best interest to do so, and that they could afford to do so. This integrates loss aversion as well. Once they can see, feel and touch that raise and start to think about what they can do with it. Once the brain takes perceived ownership over each and every dollar and it's really hard to overcome the status quo to give away money it wants to use and spend today for some future benefit. If you have not yet listened to episode nine on loss aversion, there's a link in the show notes. So just how impactful was Save More Tomorrow? Incredibly, as it turns out, 78% of people opted to use the program when it was offered to them. So that's a very vast majority. And 98% of those people were still in the program after two pay raises and 80% were still in after three pay raises. The average savings rates for participants increased from 3.5% to 11.6% in just 28 months. Amazing. Do you think those people will be happy with their choice as time goes on? Will they be happy this default existed when they get ready to retire? I'm guessing yes. And as you see, people have the option to opt out if they wanted to. This is a really creative solution that could be applied in many other areas to help people to have better lives doing all the things they know they should do and that they really want to do, but have a hard time overcoming their status quo bias to get past the default option. I've said this before, many times, but I really think this is a point where I have to bring it up again. Too many programs and approaches are trying to get people to change their natural tendencies. Telling people they need to do better, be better, think different. It doesn't work. The problem is this disconnect between the conscious and subconscious brain. We can consciously say we want to change, we want to save more, or be better, but when push comes to shove, the who's making the decisions. That's right, the subconscious. And it has a rule for that. It knows to go with the default. No reason to flag the conscious brain because I already know what to do. We can deal with that thing later because it isn't important. Why would your subconscious change what it has been learning works for hundreds of thousands of years? Just like you can't untrain your subconscious to disassociate the concept of red from the word apple. You tell it to not be subject to defaults and status quo bias. So if you know people will make errors, what can you do to help them do better? This is where Choice architecture nudges and smart defaults come into play, and I will of course give many examples in this and future episodes. And if you have not yet listened to episode one, Unlocking the Secrets of the Brain, I recommend checking it out for more insights on the subconscious and conscious brain and how they work. Okay, I'm going to go ahead and step off that soapbox for a little bit. Let me give you another example of defaults and how they impact you. This one comes from Kahneman's Thinking Fast and Slow, which I've mentioned many times on the podcast. I'm going to give you two scenarios and I want you to really listen to them and their differences so you can answer the question I'm going to pose to you after Ready? Okay. Paul owns shares in Company A. During the past year, he considered switching to stock in Company B, but he decided against it. He now learns that he would have been better off by $1200 if he had switched to the stock of Company B. Here's scenario two. George owned shares in Company B. During the past year, he switched to stock in Company A. He now learns that he would have been better off by $1200 if he had kept his stock in Company B. Who feels more regret? If you are like 92% of the population who responded to this question, you would agree that Geor, the one who moved his money away from Stock B, would feel more regret. Is that what you said or thought? Here's the thing. They both missed out on the same amount of money because they had stock A instead of stock B. They are essentially in exactly the same situation, so why would they feel differently? This is the power of the default. Remember when I said the default is always what happens if you do nothing? If you own a stock, what's the default? The default is to keep it. Every day you don't sell, you're sticking with the default. You have to make a choice, take action and move away to sell. Which means you evaluate your choices and decide to take an action. If that ends up being the wrong choice, you will be kicking yourself for messing with a good thing or meddling when you didn't need to, when you could have waited and reaped the rewards. What about Paul? He didn't take any extra action. He did what his subconscious wanted to do and he knows that most other people would have done the same thing. It takes effort and there's a risk to make a change and he can keep that in mind next time. But for now, he knows that he did what basically everyone else would have done. Do you remember last week when I said if you make a bet and come up wrong, but everyone else did too, you are much less likely to be ridiculed than if you went against the herd and made a losing bet that no one else made. This default example is showing exactly that how hurting mentality ties into defaults and the status quo to make you feel a different amount of regret even when you have exactly the same outcome based on the choices you made. The study and science of regret and its impact on the brain is also an incredibly fascinating topic and there will be an entire episode dedicated to your brain on regret. But for now, let's keep on going through the default episode. So interestingly enough, studies show it doesn't really matter what the option is. If people make a choice and step away from the status quo, which is the doing of nothing, and they lose, they feel increased regret. One study had people playing blackjack on a computer and half were presented with the question do you wish to hit? And the other half had the question do you wish to stand? Regardless of the question they were asked, people felt much more regret when they said yes than if they said no and had a bad outcome. Crazy, right? So this brings me to a question about your business. Are you ready? In your business, is it the default for your customers, current or potential to do business with you, or are you asking them to change their behavior to buy? If you're like most of us, the answer would be the latter. You are asking people to change their routine to buy from you, even if they're repeat customers. And the default is not to buy your product or service. So how can you change that? And the deeper ethical question of course is should you? But for the sake of this episode, let's assume you should and that you're going to do that responsibly. Consider subscription services to really anything in the world. Most notably, of course, would be magazines. How many people have subscriptions to magazines they don't want or read anymore and thus actually want to pay for? The answer is a lot. Paying for and having the subscription has become the default and it's likely on auto renewal. The act of turning off the auto renewal or canceling the subscription would require taking an action going again against the default. And the pain of the payment is often not enough to overcome status quo bias. You might see the charge and think, shoot, I need to cancel that before it comes out again next week, month, sl year. I'll add it to my to do list and take care of it before that comes up again. Yeah. How's that working out for you? Many companies have adopted this model for this very reason, including gym memberships, Netflix, Stitch Fix, Rent the Runway, mailchimp, Recur, Post, Xbox Live, and all sorts of apps that now offer these regular memberships you have to opt out of, and if you don't, they automatically charge your card. This also gets into Habitual Buying it's important to know that habitual buying and defaults go deeper than the products and services I just mentioned. Remember, if every decision opportunity has a default, how is the default impacting your business and the well being of your customers? Setting up automatic payments for mortgages, insurance and auto loans are defaults that really benefit everyone. People pay their mortgage on time and they get to stay in their house. They're not at risk of forgetting and being late causing additional fees because of the extra workload on the financial institution. If the default is instead to remember to write and mail a check on time, meaning you have to buy stamps and envelopes and drive to the post office, there's a lot of opportunity for late payments and status quo bias to take over when it automatically comes out of the account. Most people appreciate not having to think about the payment and remembering to make it and the financial institution gets paid back quicker and easier. Win Win Automatic payments are great defaults in many cases, but I caution you to make it easy for people to opt out if they want to. When you have a system that makes it unbelievably difficult to opt out with a bunch of ridiculous hoops to jump through, it will leave a bad taste.

In the mouth of your customers.

And as we know, people are more likely to talk about bad bad experiences, especially blasting on social media, than good ones. So it can just be bad all the way around. Know that most people will not put in the effort to cancel, but you want to make it so they don't want to cancel. Make a great service. Provide great value for the money so it's convenient and they like their default payment to you. Again, Win Win. So with that in mind, what sort of service can you provide that includes a regular automatic payment to you as the default? Is there a way to make buying from you the default? Before you say no, remember all the companies I've named who have found a way to do it and all their diverse products, services and price points. What would it look like if the default was to buy from you? Use the free worksheet@the brainybusiness.com 20 to help you work through it. Even doctors have to consider defaults when prescribing treatments. If the default safe method is not looking like a great option, but the only other option is untested and risky, do you take the gamble? If you choose the riskier, less tested option and are right, you could be a hero. But if you take the gamble and use this untested option and fail, that could mean regret, blame, and even some massive lawsuits. Or in an extreme case, losing a license. Even if the untested option could have better results, many would go with the more common recommendation, the default, and save the potential negative outcome to themselves, which is potentially at the risk of the patient. You know, it's just transferring risk. So there's a lot to consider. There's a lot of weight that comes with defaults, and we really need to be more conscious of them when we're planning them out, which is what I'm trying to help you with here in the episode. So let's get back to default settings because it's not always about buying, as I said in that doctor's example there. So looking at settings, your computer likely goes to a screensaver or to sleep after a certain period of time without you using it. Do you know how long it is? Did you set the screensaver or did you just go with the default settings when you got your computer? I'm sure you can guess that most people use the default settings. Think back to when you first got your computer or really anytime you've installed anything and you have the option to use the recommended default settings or to choose the custom installation and very likely that recommended setting was already pre selected for you. They recommended you use the default because there are a ton ton of choices in there and you're likely not an expert in computer computer programming or this specific update. So it's better to be able to go with the recommendations of the people who built the thing. They know how it works best and if anything doesn't suit your style, you can always change it, right? But will you, will that thing bug you enough that you will actually change it now that Google has become a verb? Actually, the definition of Google in Webster is to use the Google search engine to obtain information about something or someone on the World Wide web. It's safe to say that this is likely the default search engine for most people and likely a setting that you enjoy having on your computer. I know I do. When you open up a new tab in your browser, what's the website that comes up first? Did you choose that or was it a default setting on your computer? Mine is Google and I like it that way. I do a lot of research, so I use Google a lot for the podcast and all sorts of things, so it's nice to have that easily available. Though I remember once when a default setting came back to haunt me. I downloaded something from Microsoft and agreed to the default settings. I'm sure I clicked through too fast and didn't uncheck a box that I should have for myself and what I wanted. And then all of a sudden, without warning to me, my default landing page was Bing. No way. Sorry Bing, but you can't interject yourself to become the default choice that easily. Not when Google has become a verb. They might have thought they could slip through the cracks and get that by users, but I'm guessing I was not the only one to go in and change that setting immediately, even though it meant stepping out of my status quo bias and taking action. And it has left a really bad taste in my mouth that I really never even if I would have had to use Bing, I always remember that and I get irritated with Microsoft, but so you know, I'm not picking on Microsoft. Google has its own slew of default choices, some of which I don't really love. I use Gmail and I cannot for the life of me find how I can turn off my calendar from automatically setting up every meeting with more than one person to set the location as Google Hangouts. Honestly, how many people choose to have their meetings in Google Hangouts? I'm guessing it's not a lot. Most of the people I know use GoToMeeting or Zoom. I don't think I honestly have ever been invited to a meeting that uses Hangouts and if you use them, more power to you. But I don't want this to be my default, especially in a world where technology automatically syncs to my calendar. I spent half an hour today, literally today, trying to find out how I could turn this off, and I've tried more than once and all the suggested places where it should be are not there. So I'm pretty frustrated with Google's defaults right now too, and it's making me so irritated that I'm considering going back to Outlook. So know that a really badly placed default and one that is difficult to undo can make people get out of their habits and want to change everything, like I'm experiencing right now. And because I know there are a lot of very smart, talented and amazing people listening to this podcast. If you know how I can turn this off, please email me. Just don't send a meeting invite because then we might be forced to meet in Google Hangouts to turn off the setting of Google Hangouts. Anyway, my email is molina@thebrainybusiness.com if you know how to turn off this very annoying default. Thank you in advance. So this is a very gentle way to introduce you into the ethics of choice and defaults. There is a lot of debate in behavioral economics about the right way to use defaults and choice architecture. In a world where we want people to be able to choose, but we know people will make errors and often make no decision when that's the default, is that our responsibility ability to help them with a well created default? And how do we really know what's best for them? There are people on both sides of the argument of course, and I'm not going to really get into the politics of the debate. We can have a conversation about that offline if you want and I can help fill you in. Just again reach out to me. But I will say this, as I mentioned a few minutes ago, you want to make it so people still have a choice. Whatever you do when using defaults, you should make it so people have the option to do something else, to choose something else and they will not be harmed if they go with the default. Tricking people with defaults that do not suit them is bad business and bad karma. So as with everything I talk about on the podcast, please use these powers for good and not for evil. Thanks, we all appreciate it. So if you have a complicated product or service, consider adding in some sensible defaults. This is where having a most people do this which is hurting again can help show a default. If there's a list of options for people to choose from, know that having an option preselected means most people will choose it. And remember you are not required to pre select options for people. Also know that what is presented first will be more likely to be chosen. This goes for everything from survey question answers to pricing packages. And that is how anchoring and adjustment works in many ways as well. Several years ago regulations change so financial institutions could no longer assume consent and automatically opt people in for overdraft protection, giving them the option to opt out if they didn't want it. This means to get overdraft protection, something a lot of people want and would benefit from if they ever need it, and something that doesn't cost them anything if they don't use it. People now need to make a choice to opt in in for it, which goes against the status quo bias and is asking them to change a default, something we know the majority of people will not do even if it serves their best interest. But there were many people who got in trouble with overdraft protection. So there's an argument it should not be the default if people don't understand it. And of course that's the the decision that the government made. So if this was up to you, how would you choose which is the best for most people? And how do you get to determine who's most and what is best? Let's look at another topic, one that's actually a little bit more controversial. According to Organdonor.gov 95% of adults in the United States support organ donation. Do you know how many are signed up as donors? 95% of adults support it. You should have about 95% that are signed up, right? Unfortunately, not only 54% are actually signed up as donors. States have opt in rules and the default is that you are not an organ donor unless you go against the default and you have to opt in to be an organ donor. And that's how you end up with such a small percentage of actual signups versus intent. This is because of inertia and status quo. Some states are considering switching to opt out organ donation, which is also called presumed consent. This would mean that unless you specifically say otherwise, you are an organ donor. However, it would be easy and possible for anyone to opt out at any time. This of course raises concerns and controversy, which I'm not going to get into here. I'm simply presenting a situation to show how complex these issues and choices can be. And so you know, this is not an out of the Blue Initiative. 25 European countries already have presumed consent in place and the difference in donation rates is really, it's staggering. They're typically over 90% in countries with presumed consent and often below 15% in countries with opt in laws. So the question is of course, what should the default be and who gets to choose and why is our default what it is? How would we feel differently if it had always been an opt out scenario? There's a lot of power in defaults and many questions to be asked for your business. Remember that you have many defaults impacting your customers and how they interact with you at every turn. For a very sort of silly and extreme example, if you were in a restaurant, the default is to order what is on the menu. The way that it's presented there, that's the default option. And if you ever have to ask for anything special, it maybe feels a little bit uncomfortable because you're going against the status quo and the default. If you were given complete choice and there wasn't a default, you would essentially be expected to tell the chef exactly how to make everything that you need and give them a recipe every time you're looking to order from a restaurant, which is absolutely ridiculous. That is an area of having no defense defaults. Theoretically, the default is you get no food, they have no recipes, and that would be completely silly. So, understanding that defaults truly are everywhere and in everything, how do you incorporate them properly into your business and be more aware of them as a customer? And are you considering how all those defaults make it easier or harder for people to work with you? Are you taking them for granted? Are your defaults making it so less of your employees will save enough for retirement? Or are you helping them to accomplish their goals in a way that works with their brain and its natural tendencies? While it's a bit nerdy, I do feel compelled to end this episode on defaults with a Spiderman quote. You likely know what it is and can say it along with me. With great power comes great responsibility. Please use defaults responsibly now that you know how they work and just how prevalent and powerful they are.

So what got your brain buzzing as you learned about defaults today? For me, whenever I think and talk about defaults, I always like to remind.

People about how likely people are to.

To choose a default option, even when.

It'S arguably or even obviously worse than.

The alternative you are offering. The pull of the status quo is real, and something you, as an outsider think is clearly bad may not seem the same to someone on the inside who's driven by predictability and what feels familiar. On the flip of that, what aren't you doing or trying because it's outside of your own status quo default? Or what are you ignoring? What aren't you trying? What questions aren't you asking? Taking some time to slow down and consider the defaults every so often will help you to find what isn't serving you well. So you can determine what to change into the future. Then you can set up nudges to support the process. And whatever you do, I recommend you focus on one thing at a time. The episodes over the next couple of weeks are going to be digging in on habits, how to get better at anything, how to change, and more. More It's a great series that thinking about defaults can really help with. So before you move on to whatever you've planned to do next in your day, take a moment to consider your own defaults. What's one thing you're defaulting to now that isn't serving you well? Keep that in mind as you start to consider the habits that are going into it and how you might like to shift it into the future. If you aren't already subscribed to the Brainy Business podcast, now is a great time to do so. To make sure you don't it miss miss any of those episodes. There are, of course links in the show notes along with links to my top related past episodes, books and more. It's all waiting for you in the app you're listening to and at the brainy business.com426 and just like that, episode 426 on defaults is done.

Join me Friday for a brand new.

Episode with Nobel Prize Prize winner Dr. Bob Lefkowitz. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me. And remember to be thoughtful.

Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more more brain friendly. For more free resources, visit thebrainybusiness.com.