Semantron 23 Summer 2023


dessert aisle may today be desperate to purchase a chocolate fudge cake, while their long-term preference of quitting cake entirely contradicts this, resulting in a conflict of preferences which the traditional rational agent model fails to explain or account for. And although additional cake purchases may seem relatively insignificant in informing microeconomic policy and correcting market failures, a more notable example, such as the default bias, or default inertia, may have more problematic effects. Default bias presents itself in various forms, ranging from choosing the same lunch option every day in the canteen, all the way up to simply selecting the default option for a pension plan, or changing organ donation preferences simply on the need to tick a box. This negligent default offers both an excellent opportunity for policymakers to maximize social welfare, and an opportunity for firms to extort lazy or pre-occupied consumers. For policymakers, this default inertia offers one of the single greatest advantages to the use of heuristics, in that the requirement to opt out can be the sole catalyst for change in an entire field, as has proved the case with organ donation. 5 The extraordinary effect, in moving from an opt-in to an opt-out default system of donation, has been seen in a complete reversal in donation rates, despite the choice and effort input required remaining almost entirely the same. Even in countries considered extremely culturally homogenous, with cultural attitudes perhaps considered the main differentiating factor for differing donation levels ceteris paribus , such as Germany and Austria, cultural factors have proved to be of negligible consequence. In the German opt-in scheme, donation rates stood at 12%, whilst in the Austrian opt-out system, donation rates sat at 100% (to the nearest integer), a near inexplicable gap if the rational agent model is to be accepted. However, this simple opt-out choice architecture is by no means the limit of welfare maximizing policy tools; other methods offer far more comprehensive and significant ability to reorient decision-making even with large financial incentives involved. (Wisson, 2017) offers further insights into the potential benefits of using the default bias to maximize social welfare. In a model of procrastination-induced inertia, Wisson argues, and proves, that the use of an aggregate social welfare maximizing policy option, e.g. in pre-selecting pension defaults, leads to the best outcome. This challenges the previous popular model, 6 which suggested that the pre-selection of the least privately beneficial option maximizes social welfare best. The reasoning behind this was grounded on the belief that no (rational or irrational) consumer would accept a scheme that so adversely affected their long-term welfare, and in turn this additional incentive of financial opportunity cost loss would prove significant enough for consumers to overcome present bias and research their options, and in turn learn their own preferences. However, as Wisson points out, this presumes that procrastination is the sole cause of default inertia, 7 which is somewhat foolhardy, given that it suggests significant effortful input can be incentivized by long-term loss in present-biased individuals, a self-defeating proposition. Further, Wisson suggests the use of a consumer categorization, in order to sort groups of different welfare maximizing defaults, with the most determinant factors of these categories being age and career stage. Preferential factors, such as quality

5 TED. (2009, May 19). Are we in control of our decisions? | Dan Ariely [Video]. YouTube.

6 Laibson, D. I., Repetto, A., Tobacman, J., Hall, R. E., Gale, W. G., & Akerlof, G. A. (1998). Self-Control and Saving for Retirement . Brookings Papers on Economic Activity, 1998 (1), 91 – 196. 7 Wisson, J. (2016). Essays in behavioural economics [PhD thesis]. University of Oxford.


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