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How is it that 12 percent of Germans consent to being organ donors, yet neighborhing Austria has a 99.9 percent consent rate? At a seminar organized by the Regulatory Policy Program on November 29, Professor Cass Sunstein explained that in Austria, citizens are automatically designated organ donors unless they opt out of the program, while in Germany people must opt in.
Sunstein, Felix Frankfurter Professor at Harvard Law School and former Administrator of the White House Office of Information and Regulatory Affairs, argued that default rules strongly influence consumer behavior, and that government “choice architects” could use default rules to achieve policy goals.
According to Sunstein, choice architects have three options: set impersonal defaults that are the same for all consumers, require consumers to make active choices about their decisions, or provide personalized defaults that differ by consumer or group. Impersonal defaults may result in sub-optimal decisions. “People typically say ‘yeah, whatever, I’ll stick with [the default],’” Sunstein said, unless the default is exceedingly unwanted. An active choice model can result in better outcomes, but only for straightforward decisions. “If a situation is unfamiliar and complicated, then active choosing may impose unjustified or excessive costs,” Sunstein continued, giving as an example the impracticability of choosing all cell phone options at purchase.
Personalized default rules, conversely, can provide a diverse array of consumers accurate and beneficial rules without the transaction cost. Personalization only works if choice architects know consumers’ past choices, or can make frame rules based on consumers’ characteristics. Understanding the evolution of preferences over time is also important. Technology has enabled certain industries to personalize defaults, such as storing credit card information online and retaining knowledge about airplane seat preferences.
Lawrence Summers, the Charles W. Eliot University Professor, provided a commentary on Sunstein’s presentation. Summers noted that consideration of default rules in public policy should account for the broader context of decisions by private firms. Profit-maximization drives firms to limit choices at the firm-level and market forces naturally yield defaults. Sunstein noted his intent to highlight insights about the power of default rules for private institutions and illuminate ways for the public sector to employ default models to deliver societal goals.
This seminar is part of a series sponsored this fall by the Regulatory Policy Program (RPP) at the Mossavar-Rahmani Center for Business and Government. The series explores new directions in regulation. RPP serves as a catalyst and clearinghouse for the study of regulation across Harvard University. The program's objectives are to cross-pollinate research, spark new lines of inquiry, and increase the connection between theory and practice. Prof. Sunstein’s working paper is available on the Regulatory Policy Program website.