Defaults with Misaligned Incentives : The Role of Cognitive Effort

We explore experimentally a cognitive-effort channel through which defaults might influence behavior in an environment where the choice architect has misaligned incentives. Our experimental setting is an insurance market where the firm is better informed about the aggregate statistical risk associated with potential buyers of a policy than the buyers themselves. Since buyers’ perceived risk and actuarially fair risk differ, the firm has incentives to exploit buyers’ informational disadvantage. We find that defaults can strongly influence purchasing behavior in this environment. Further, by using a decision-time manipulation that lowers the opportunity cost of decision-making time, we provide channel-specific evidence that defaults operate by influencing decisions of individuals who find the cognitive costs of active decision-making prohibitively high