Introduction

Jill is a transfer student who arrived on campus several months ago, deciding to live off campus. When she was hungry on her first day after arriving, she walked around the street near her apartment, where dozens of restaurants were located. Each of the restaurants looked good, and eventually she decided simply to walk in the next one she came across. Since that time, she has tried some of the other restaurants nearby, and some are very good, but she most often eats at that same restaurant. It is not the nearest to her apartment, but nonetheless she considers it worth the walk. Consider also a person who is buying auto insurance for the first time, meeting with the insurance agent. The policies are rather complicated and involve making decisions regarding several different parameters (e.g., collision coverage, deductibles). The purchaser desires a good price on the insurance policy, but she finds it difficult to determine how likely it is that she will need each type of coverage, to determine the level of coverage she would need, and to decide how often she would need to pay the deductible. After describing all of the potential parameters and options, the agent says, “Here is our standard policy,” pushing across the desk a packet of paper describing the types of coverage included in the standard policy. “It is possible to add any of the extras or subtract many of the options from this, but this is the policy we recommend.” After considering for a couple of minutes, the purchaser decides to purchase the standard policy. Later, when she has the chance to reexamine her policy upon renewal, she opts to continue with the standard package.

A single decision—or even a chance event—can set up habitual behavior that continues for long periods of time relatively unexamined. The fact that one has always walked a particular way to work might lead one to continue to walk that way to work even if one discovers other routes are more scenic or shorter. Further, when other, potentially more desirable, options are presented, people might resist change altogether. People often shape their view of the correct choice by the actions that seem to be suggested by the situation. In many cases, a default option is available. A default option is one that is automatically selected when the decision maker expresses no explicit choice. For example, many brands of computer arrive with the Windows operating system installed unless the consumer requests some other operating system.

This chapter further develops the prospect theory foundation to explain why people might favor the status quo, as well as why they might value items in their possession more than identical items not in their possession. Further, we discuss the use of default options to shape consumer choice in policy and in business applications. In many respects, the use of default options can be considered the most successful contribution of behavioral economics to public policy at the present writing.