Knowing When to Quit: Default Choices, Demographics and Fraud

We study defaults in a novel setting where the optimal choice is clear: the decision to escape from fraud. A government lawsuit created a natural experiment whereby some consumers enrolled in a fraudulent subscription programme were cancelled by default, while others had to actively cancel. We find that cancelling subscriptions by default increased cancellations to 99.8%, 63.4 percentage points more than requiring active cancellation. We also find that consumers residing in poorer, less-educated Census blocks were more likely than average to cancel prior to the lawsuit, but were less likely to actively cancel when notified they could do so. The structure of choices can have a substantial effect on an individual’s behaviour. In particular, the default option, the outcome that occurs when an individual takes no action, can have important impacts. Standard economic theory says that, in absence of substantial transaction costs, the default should not matter, as agents will choose to switch away when the default is not appropriate for them. However, a long literature in behavioural economics and psychology has shown that consumers tend to take no action and stick with the default option. This finding has led to policies designed to guide consumers to better decisions by ∗Corresponding Author: Robert Letzler, Government Accountability Office, Washington DC, 20548, USA. Email: LetzlerR@gao.gov. We are grateful to the editor, two anonymous referees, Patrick McAlvanah, Chris Wheeler, Joelle Abramowitz, Keith Anderson, Alex Bell, Saurabh Bhargava, Rozi Bhimani, Tim Daniel, Pete Dykstra, Marc Elliot, Peter Fishman, Avi Goldfarb, Manoj Hastak, Dan Hosken, Courtney LaFountain, Jesse Leary, Michael LeGower, Janis Pappalardo, Devesh Raval, Brian Rowe, Geno Smolensky, Alex Tang, Joshua Tasoff and Erez Yoeli for helpful comments and support. Eric Schaeffer provided outstanding research assistance. Any opinions expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Trade Commission or the Government Accountability Office.