Giving Away $900 Million: The Cost of “Default Neglect”

Source: David P. Daniels

This post was authored by David P. Daniels (with Julian J. Zlatev, a professor at Harvard University).

Every year, Google reportedly spends billions of dollars to make its search engine the default option across web browsers and smart devices. To become the default, Google has made huge payments ranging from $323 million (to Mozilla in 2014) to as much as $12 billion (to Apple in 2019). These sky-high valuations suggest that Google understands the immense power of the default effect—people’s tendency to stick with the status quo. For decades, the default effect has been a focus of business deals, billion-dollar lawsuits, and multiple New York Times bestsellers (including the 2008 book Nudge). The European Union has even forbidden “pre-ticked boxes” as part of a general ban on obtaining consent by using the default effect.

Defaults have an enormous (albeit stealthy) impact on human behavior. If Google is the default search engine, then more people will end up using Google. If HIV screening is provided by default in emergency rooms, then more people will end up being screened for HIV. If people are automatically registered to save money for retirement, then more people will end up saving money. If people are signed up to be organ donors by default, then more people will end up donating their organs, and more lives will be saved via organ donation. And so on. For reasons like these, Richard Thaler (winner of the Nobel Prize in Economics) has highlighted the default effect as one of the most important contributions of behavioral economics to policy.

Finding Default Neglect

Since defaults have been well-established as a simple and powerful influence tool, and since we encounter defaults every day (who among us hasn’t accidentally “signed up” for an email list just because they forgot to untick a pre-ticked checkbox?), we assumed people would understand how to use the default effect to influence others. And we found that other researchers agreed with our intuitions. Nonetheless, this assumption had never been directly examined. So we decided to run the test—but we discovered that our assumption was wrong.

The two of us (together with Hajin Kim, a professor at the University of Chicago, and Margaret Neale, a professor at Stanford University) asked thousands of people—including executives, MBA students, medical students, and law students—to try to influence others by using defaults.

Surprisingly, we found that people often failed to understand or use defaults. That is, many people neglected the power of the default effect—a phenomenon known as “default neglect.” In many cases, people’s ability to use defaults was no better than random chance—even when they had multiple opportunities for experience and feedback.

The Cost of Default Neglect

The existence of default neglect helps explain a colossal error made by Citigroup in 2020 that was ultimately caused by a bad default. As it turns out, Citigroup’s computer system “has a default mode that will send a wire payment” back to a lender “unless the [decision-maker] overrides that option.” One day, Citigroup’s managers failed to override this default for some payments—and ended up giving away over $900 million by mistake. A manager explained that “the mistake had not been caused by any sort of glitch but rather by human error.”

Given that defaults are so powerful, why do people show default neglect? We think it’s because they fail to appreciate why defaults are so sticky. In one study, we found that when we highlighted specific reasons why others stick with defaults (“they’re lazy!”), then people did show some intuitive grasp about why defaults work (“lazy decision-makers are more likely to stick with defaults!”).

But when we simply asked people whether others stick with defaults, the mental image of a lazy decision-maker just didn’t come to mind. Instead, people seemed to think, “A checkbox is only a checkbox—how influential could it possibly be?” What they failed to realize is that, because of laziness (and other psychological forces), checkboxes can act as potent default nudges and thereby have powerful impacts on our decisions about whether to save money, save the environment, or save lives.

The lesson for leaders and managers is clear. Someone at Google understands the power of defaults. Someone at Citigroup neglected the power of defaults—and paid a huge economic price.

The bad news is that, for people who want to influence others, default neglect represents an enormous missed opportunity. But here’s the good news: Just because most people overlook defaults doesn’t mean that you necessarily have to. If you understand how to wield the power of the default effect, you can expect to gain a critical edge over competitors who don’t.