Welfare Assessment of
Default-Setting Policies
Till Grüne-Yanoff,
Royal Institute of Technology, Stockholm
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The Argument
Overview
Default Policies
Welfare
5 Explanations
Conclusions
i.  Default effect an empirical regularity between context
and behaviour
ii.  Explanation of this regularity controversial: 5 different
accounts
iii.  Welfare assessment of default policies dependent on
which explanation is assumed to be correct
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The Argument
Overview
Default Policies
Welfare
5 Explanations
Conclusions
i.  Default effect an empirical regularity between context
and behaviour
ii.  Explanation of this regularity controversial: 5 different
accounts
iii.  Welfare assessment of default policies dependent on
which explanation is assumed to be correct
⇒ Non-robustness, context-dependence of welfare
assessment.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What is a Default Effect?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Default:
"Choose between A,B,C. If you do not indicate a choice, you will receive the
default option"
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What is a Default Effect?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Default:
"Choose between A,B,C. If you do not indicate a choice, you will receive the
default option"
Default effect:
60
60
40
40
20
20
0
A
B
C
☐ Option A
ý
Option B
☐ Option C
0
A
B
C
☐ Option A
☐
Option B
ý Option C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What is a Default Effect?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Default:
"Choose between A,B,C. If you do not indicate a choice, you will receive the
default option"
Default effect:
60
60
40
40
20
20
0
A
B
C
☐ Option A
ý
Option B
☐ Option C
0
Empirical
effects:
25 - 70%
A
B
C
☐ Option A
☐
Option B
ý Option C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What are Default Policies?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What are Default Policies?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Policy maker sets the default with the purpose of
making more people end up with the default option
•  for their own good
•  for some other (e.g. social or commercial) reason
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What are Default Policies?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
What welfare
Policy maker sets the default with the purpose of
criterion?
making more people end up with the default option
•  for their own good
•  for some other (e.g. social or commercial) reason
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Welfare Criterion?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
"In some cases individuals make inferior decisions in terms of their own
welfare— decisions that they would change if they had complete
information, unlimited cognitive abilities, and no lack of selfcontrol." (Sunstein and Thaler 2003, 1162)
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Welfare Criterion?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
"In some cases individuals make inferior decisions in terms of their own
welfare— decisions that they would change if they had complete
information, unlimited cognitive abilities, and no lack of selfcontrol." (Sunstein and Thaler 2003, 1162)
“Note that defaults can lead to two kinds of misclassification: willing
donors who are not identified or people who become donors against
their wishes." (Johnson and Goldstein 2003, 1339)
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Welfare Criterion?
Overview
Default Policies
Welfare
5 Explanations
Conclusions
"In some cases individuals make inferior decisions in terms of their own
welfare— decisions that they would change if they had complete
information, unlimited cognitive abilities, and no lack of selfcontrol." (Sunstein and Thaler 2003, 1162)
“Note that defaults can lead to two kinds of misclassification: willing
donors who are not identified or people who become donors against
their wishes." (Johnson and Goldstein 2003, 1339)
W = Proportion of people who have their optimum
(according to their true preferences) satisfied.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
3 Differential Effects of Defaults on W
Overview
Default Policies
Welfare
5 Explanations
Conclusions
1. Individual Welfare Relevance
100
0
100
A B C
0
A B C
☐
Option A
☐
Option A
☐
Option B
ý
Option B
☐
Option C
☐
Option C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
3 Differential Effects of Defaults on W
Overview
Default Policies
Welfare
5 Explanations
Conclusions
1. Individual Welfare Relevance
100
0
100
A B C
0
2. Effect Asymmetry
A B C
100
50
☐
Option A
☐
Option A
☐
Option B
ý
Option B
☐
Option C
☐
Option C
0
100
0
A B C
☐
Option A
ý
Option B
☐
Option C
A B C
☐
Option A
☐
Option B
☐
Option C
100
50
0
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
A B C
☐
Option A
☐
Option B
ý
Option C
3 Differential Effects of Defaults on W
Overview
Default Policies
Welfare
5 Explanations
Conclusions
1. Individual Welfare Relevance
100
100
0
0
A B C
2. Effect Asymmetry
A B C
100
50
☐
Option A
☐
Option A
☐
Option B
ý
Option B
☐
Option C
☐
Option C
0
100
0
3. Heterogeneous Switching
60
60
40
40
20
20
0
A
B
C
0
A
B
A B C
☐
Option A
ý
Option B
☐
Option C
A B C
☐
Option A
☐
Option B
☐
Option C
C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
100
50
0
A B C
☐
Option A
☐
Option B
ý
Option C
What Brings About Default Effects?
Five competing explanations:
Overview
!
Default Policies
Welfare
5 Explanations
Conclusions
Option A
Option A
Option B
Option B
Option C
!
Option C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
Option A
4.  Recommendation
! Option B
effect
Option C
5.  Change of meaning
Conclusions
Option A
Option B
!
Option C
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Resolution of preference
conflict too much effort.
Choose with default
heuristic instead: "If there
is a default, do nothing
about it".
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Resolution of preference
conflict too much effort.
Choose with default
heuristic instead: "If there
is a default, do nothing
about it".
-----1. Not welfare relevant
2. Symmetric
3. Heterogeneous switch
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Choosing non-default
option incurs costs in
terms of time, search
effort or money.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Choosing non-default
option incurs costs in
terms of time, search
effort or money.
-----1. Not welfare relevant
2. Symmetric
3. Homogenous switching
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Preferences between
options involve trade-off
between dimensions.
Default setting increases
impact of those
dimensions that are
considered a "loss" on
preference judgment.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Preferences between
options involve trade-off
between dimensions.
Default setting increases
impact of those
dimensions that are
considered a "loss" on
preference judgment.
-----1. Not welfare relevant
2. Asymmetric
3. Heterogeneous switch
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Chooser interprets
default as signal from
policymaker that default
option is particularly
recommended.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Chooser interprets
default as signal from
policymaker that default
option is particularly
recommended.
-----1. Welfare relevant
2. Asymmetric
3. Homogeneous switch
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Setting default affects
meaning of options. E.g.
under opt-in, being a
donor means something
different than being a
donor under opt-out.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
What Brings About Default Effects?
Overview
Default Policies
Welfare
5 Explanations
5 competing explanations:
1.  Cognitive effort
2.  Switching costs
3.  Loss aversion
4.  Recommendation
effect
5.  Change of meaning
Conclusions
Setting default affects
meaning of options. E.g.
under opt-in, being a
donor means something
different than being a
donor under opt-out.
-----1. Prob. welfare relevant
2. Asymmetric
3. Heterogeneous switch
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
Summary: Differential W-Effects by Explanation
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Individual
welfare
relevance
Asymmetric
effect
Heterogeneous
Switching
Cognitive effort
No
Symmetric
Heterogeneous
Switching costs
No
Symmetric
Homogenous
Loss aversion
No
Asymmetric
Heterogeneous
Recommendation
Yes
Asymmetric
Homogenous
Meaning Change
Probably yes
Asymmetric
Heterogeneous
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
contribution
rate (the default); and fully 79 percent of employees
A6 percent
Numerical
Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Fig.
5.3 Automatic
for new
hires
and the
distribution
of 401(k) contriDistribution
of 401kenrollment
contribution
rates
under
two
defaults (Beshears,
Choi,
bution rates: Company A (15–24 months tenure)
Laibson and Madrian 2009, 173)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
contribution
rate (the default); and fully 79 percent of employees
A6 percent
Numerical
Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
contribution
rate (the default); and fully 79 percent of employees
A6 percent
Numerical
Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
contribution
rate (the default); and fully 79 percent of employees
A6 percent
Numerical
Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
contribution
rate (the default); and fully 79 percent of employees
A6 percent
Numerical
Example
Overview
Default Policies
Mean: 6.88%
Mean: 6.31%
Welfare
5 Explanations
Conclusions
σ=3.97
σ=3.47
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Worst-Case Scenario: e.g. Loss Aversion
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Worst-Case Scenario: e.g. Loss Aversion
•  Default set at 3%: 24 individuals choose against their preferences
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution rates: Company A (15–24 months tenure)
Source: Authors’ calculations.
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Worst-Case Scenario: e.g. Loss Aversion
•  Default set at 3%: 24 individuals choose against their preferences
• 
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution
rates: switched
Company A (15–24
months tenure)
Default
to 6%:
Source: Authors’ calculations.
•  5+5=10 switch from default to non-default
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Worst-Case Scenario: e.g. Loss Aversion
•  Default set at 3%: 24 individuals choose against their preferences
• 
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution
rates: switched
Company A (15–24
months tenure)
Default
to 6%:
Source: Authors’ calculations.
•  5+5=10 switch from default to non-default
•  1+1+10=12 switch from non-default to default
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Worst-Case Scenario: e.g. Loss Aversion
•  Default set at 3%: 24 individuals choose against their preferences
• 
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution
rates: switched
Company A (15–24
months tenure)
Default
to 6%:
Source: Authors’ calculations.
•  5+5=10 switch from default to non-default
•  1+1+10=12 switch from non-default to default
Altogether 46 individuals choose against their true preferences
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
The distributions of contribution rates are strikingly different for the
two regimes. Under the 6 percent default regime, only 4 percent of employees have a 3 percent contribution rate; 49 percent of employees have a
6 percent contribution rate (the default); and fully 79 percent of employees
A Numerical Example
Overview
Default Policies
Welfare
5 Explanations
Conclusions
Best-Case Scenario: e.g. Recommendation Effect
•  Default set at 3%: 24 adjust their preferences according to
Fig. 5.3 Automatic enrollment for new hires and the distribution of 401(k) contribution
rates: Company A (15–24 months tenure)
recommendation
Source: Authors’ calculations.
•  Default switched to 6%:
•  For 10, new recommendation isn't strong enough to choose default
•  For 12, recommendation is strong enough to choose default
Everybody's welfare-relevant preferences are satisfied
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies
Conclusion
Overview
Default Policies
Welfare
5 Explanations
Conclusions
•  Non-robustness result: welfare
assessment of default policy depends on
assumption about underlying causal
mechanisms
•  Need for detailed investigation of context
before policy is implemented
•  A welfare economics that relies only on
choices and ancillary conditions (e.g.
Bernheim & Rangel 2009) is hopeless
Till Grüne-Yanoff Welfare Assessments of Default-Setting Policies