Have you ever been overwhelmed by the choices in a restaurant’s wine menu and just decide on the house wine? Or, when you buy the latest electronic gadget, do you just accept the factory default settings and not even bother changing even the ringtone?
If so, these decisions, or non-decisions, are because of the default effect.
Most people are happy to stick with the standard options. Even when we have several choices, we go with the default choice because it’s easier and more comfortable. Governments and other authorities know this and use it to nudge us in a certain direction.
For example, in one experiment scientists asked people about donating their organs when they die. Normally, only about 40 percent of people choose to donate their organs. But when donating organs was made the default option, more than 80 percent of people opted to donate – twice as many.
Even when there is no default, or standard, option given, we tend to use the past as our default setting. Most people like to stick with what they know and are anxious about making big changes or taking on new risks, even if the change would be good for us.
This default bias is the offspring of two other biases: status quo bias and loss aversion. Keeping things the same (status quo) is convenient, and the pain of losing is greater than the joy that comes from winning (loss aversion). Put these together, and our brains often tell us it’s just easier to keep things the same and avoid any potential loss that might come from changing things.
For investors, this default bias can stop us from making changes to our portfolio or strategy because it’s too inconvenient or it makes us feel uncomfortable. Or, it can cause us to just accept what our banker tells us, or what they are trying to sell us, because it’s just easier to do. We tend to cling to the way things are, even if it’s not the best thing for us.
To deal with this, you need to change the default setting on our own thinking from time to time. Look at all the options and see which one is best for you. Research what you don’t understand and make an informed decision. Then, change what is needed even if it’s not convenient or easy to do.
It will pay off in the long run.