A new study in the Economic Journal provides evidence that poor choice design can cause consumer errors – and that these errors can be larger in poorer, less educated neighbourhoods.
A US government lawsuit against a fraudulent firm created a situation akin to an experiment in which comparable groups of consumers were assigned to make the same decision in different ways: some who were enrolled in a fraudulent subscription programme were cancelled by default; while other subscribers had to cancel actively by making a phone call or mailing a form.
Researchers from Carnegie Mellon University, Indiana University and three US government agencies find that cancelling subscriptions by default increased cancellations to 99.8% (see Figure 1 below), which is 63.4 percentage points more than those requiring active cancellation.
The study, which is published in the December 2017 issue of the Economic Journal, also finds that consumers residing in poorer, less educated areas were more likely than average to cancel prior to the lawsuit, but they were less likely actively to cancel in response to a complex, five-paragraph letter.
These results indicate that psychologically and behaviourally informed policies can improve consumers'' wellbeing – corroborating evidence from the 2017 economics Nobel laureate Richard Thaler and many others – but that the effectiveness may vary by demographics.
Between 2000 and 2007, Suntasia, a fraudulent telemarketing firm, charged hundreds of thousands of consumers monthly for essentially worthless subscriptions. Consumers paid Suntasia an average of $239 over the course of their subscriptions, totalling over $171 million across all consumers.
The US Federal Trade Commission sued the firm in 2007, temporarily closing it down. During the litigation, the court required Suntasia to offer current subscribers the choice of either continuing to participate in and be charged for the subscriptions, or cancelling. These notifications created a pseudo-experiment that varied the default options for consumers'' subscriptions.
Under the court order, consumers enrolled prior to 1 February 2007 received a complex, five-paragraph letter telling them that their subscriptions would continue by default: these consumers had to take action (complete and mail a form or make a phone call) to cancel their subscriptions.
In contrast, consumers enrolled after 1 February 2007 were sent an otherwise identical letter informing them that their subscriptions would be cancelled by default: these consumers had to take action to continue their subscriptions.
Given that very few consumers ever used any features of the subscriptions, nearly every subscriber would have been best off cancelling as soon as possible.
The researchers find that 99.8% of consumers made the correct decision to end a fraudulent subscription when it was the default, but only 36.8% of similarly situated consumers ended the subscription when they had to take action to do so.
In addition, sending complex letters to the firm''s customers and requiring them to cancel actively was less effective at protecting consumers from low socio-economic status (SES) neighbourhoods. Without letters, consumers living in low SES neighbourhoods were about 2.3 percentage points more likely to cancel, a 30% difference compared with consumers in high SES neighbourhoods.
But in the responses to the letters notifying consumers that their subscriptions would continue unless they cancelled, this relationship reverses: the researchers estimate that a consumer in a high SES neighbourhood would be 6.5 percentage points more likely to cancel than a consumer in a low SES neighbourhood.
Although the population studied may not be representative of the broader population, this study provides simple and direct evidence that bad defaults can cause a large number of consumers to make errors. In addition, it suggests smart policy design – such as setting the correct default – can have bigger benefits for low SES consumers than for high SES consumers.
''Knowing When to Quit: Default Choices, Demographics and Fraud'' by Robert Letzler, Ryan Sandler, Ania Jaroszewicz, Isaac Knowles and Luke Olson is published in the December 2017 issue of the Economic Journal. Robert Letzler is at the Government Accountability Office in Washington DC. Ryan Sandler is at the Consumer Financial Protection Bureau. Ania Jaroszewicz is at Carnegie Mellon University. Isaac Knowles is at Indiana University. Luke Olson is at the Federal Trade Commission.