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Choice or No Choice: What explains the Attractiveness of Default Options?

  • Maarten van Rooij
  • Federica Teppa

The default option in individual decision making has proved to be a major attractor in a large number of situations, but we still have little information on the reasons why decision makers so often stick to the default choice. We have devised a new module for the Dutch DNB Household Survey to learn about default behavior and to discriminate between potential explanations. The main contributions of this paper are as follows. First, we identify potential explanations for default choices (including procrastination, inertia, illiteracy, obedience and regret aversion). Second, we provide empirical evidence on their relative importance in a large number of situations. Third, our survey data allow us to analyze the entire population distribution instead of selected groups (like workers, or students) and to control for a rich set of personal characteristics, as well as for labor market status, income, and wealth. Our findings confirm that the default choice plays a key role in individual decision making. Inaddition, we show that its relevance differs across domains: the default option attracts the majority of preferences in situations where the marginal disutility associated with postponing the decision is relatively low, or where the choice problem is increasingly complex. Moreover, we find that even though choice behavior is principally driven by different reasons across different situations overall procrastination and financial illiteracy provide the mostpowerful explanations for why people stick to the default.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 165.

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Date of creation: Jan 2008
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Handle: RePEc:dnb:dnbwpp:165
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  1. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
  3. M.C.J. van Rooij & A. Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 07-23, Utrecht School of Economics.
  4. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "The importance of default options for retirement saving outcomes: evidence from the United States," CeRP Working Papers 43, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  5. Arie Kapteyn & Federica Teppa, 2002. "Subjective Measures of Risk Aversion and Portfolio Choice," Working Papers 02-03, RAND Corporation Publications Department.
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  7. Ted O' Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," Microeconomics 0012002, EconWPA.
  8. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  9. M.C.J. van Rooij & C.J.M. Kool & H.M. Prast, 2005. "Risk-return preferences in the pension domain: are people able to choose?," Working Papers 05-04, Utrecht School of Economics.
  10. David A. Wise, 2004. "Perspectives on the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise04-1, December.
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  12. repec:oup:qjecon:v:112:y:1997:i:2:p:443-77 is not listed on IDEAS
  13. Alberto Abadie & Sebastien Gay, 2004. "The Impact of Presumed Consent Legislation on Cadaveric Organ Donation: A Cross Country Study," NBER Working Papers 10604, National Bureau of Economic Research, Inc.
  14. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  15. repec:oup:qjecon:v:116:y:2001:i:1:p:121-160 is not listed on IDEAS
  16. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  17. repec:tpr:qjecon:v:116:y:2001:i:1:p:121-160 is not listed on IDEAS
  18. Alessie, Rob & Hochguertel, Stefan & van Soest, Arthur, 2006. "Non-take-up of tax-favored savings plans: Evidence from Dutch employees," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 483-501, August.
  19. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
  20. repec:tpr:qjecon:v:116:y:2001:i:4:p:1149-1187 is not listed on IDEAS
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