Choice Architecture

Choice Architecture in Action

Choice architects can make major improvements to the lives of others by designing user-friendly environments. Many of the most successful companies have succeeded in the marketplace for exactly that reason. Sometimes the choice architecture is highly visible, and consumers and employees appreciate the value it provides. Apple’s iPhone became an enormous economic success in part because of its elegant style, but mostly because users found it easy to get the device to do what they want. Sometimes the choice architecture is neglected and could benefit from some careful attention.

Consider an illustration from the American workplace. (If you live elsewhere, please take pity on our plight.) The authors describe employers offering life and health insurance and retirement savings plans, with an annual enrollment period for revising choices. In their example, employees must make their choices online after receiving materials and reminders.

Because employees are human, some neglect to log on, so it is crucial to decide what the default options are for these busy, absentminded, and perhaps even overwhelmed employees. Usually, the default is one of two options: employees can be given the same option they chose the previous year, or their choice can be set back to “zero.” Call these the “status quo” and “back-to-zero” options. How should the choice architect choose between these defaults?

Libertarian paternalists would like to set the default by asking what thoughtful and well-informed employees would actually want. Although this principle may not always lead to a clear choice, it is certainly better than choosing the default at random, or making either status quo or back to zero the default for everything. For example, it is a good guess that most employees would not want to cancel their heavily subsidized health insurance. So, for health insurance the status quo default (same plan as last year) seems strongly preferable to the back-to-zero default (which would mean going without health insurance).

Compare this to an employee’s flexible spending account, a peculiarly cruel “benefit” that we believe exists only in the United States. An employee can contribute money into this account each month that can then be used to pay for certain expenditures (such as uninsured medical or childcare expenses). Under the rules the authors describe, money must be spent by March 31 of the following year or be lost; that deadline is part of their example, not a universal statement of current account rules. Expected expenditures may also vary greatly from one year to the next (for example, medical expenses might go up in a year in which a family welcomes a newborn, or childcare expenses might go down when a child enters school). In this case, the back-to-zero default probably makes more sense than the status quo.

This problem is not hypothetical. Some time ago, Thaler had a meeting with three of the top administrative officers of his employer, the University of Chicago, to discuss similar issues, and the meeting happened to take place on the final day of the open enrollment period. He mentioned this coincidence and teasingly asked whether the administrators had remembered to log on and adjust their benefits package. One sheepishly said that he was planning on doing it later that day and was glad for the reminder. Another admitted to having forgotten, and the third said that he was hoping his wife had remembered to do it! The group then turned to the topic of the meeting, namely what the default should be for an option with the uninviting name “supplementary salary reduction program” (it’s better than it sounds; it’s actually a tax-sheltered savings program). At that time the default was the back-to-zero option, and Thaler had arranged the meeting hoping to convince the administrators to change the default to “same as last year.” After their own absentminded behavior was made salient to them, the administrators quickly agreed to the change. We are confident that many university employees will have more comfortable retirements as a result.

This example illustrates some basic principles of good choice architecture. Choosers are human, so designers should make life as easy as possible. Send reminders (but not too many!) and then try to minimize the costs imposed on those who, despite your (and their) best efforts, space out. The same design questions can arise in public agencies, universities, and businesses of different sizes.