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Behavioural Finance & Investor Decision-Making
1Foundations
The Rational InvestorJudgment Under UncertaintyPreferencesBehavioural FinanceInvestor and Market BehaviourFinancial Well-BeingBounded RationalityHeuristics and Biases
2Cognitive Biases, Emotion and Attention
Limited AttentionRepresentativenessThe Affect HeuristicAnchoring and AdjustmentEmotion and Decision QualityOverconfidence and OptimismAmbiguity and Complexity AversionAvailability and SalienceHome Bias, Local Bias…FramingThe Halo EffectHindsight BiasThe Narrative FallacyPresent Bias and Hyperbolic DiscountingBase-Rate NeglectStatus Quo Bias and the Default Effect
3Preferences and Prospect Theory
Prospect TheoryRegretThe Endowment EffectMental AccountingThe Sunk Cost FallacyLoss AversionRisk Seeking in Losses
4Social Behaviour
HerdingNarrative EconomicsFear of Missing OutGroupthinkSocial Proof
5Investment and Trading Behaviour
Excess TradingNaive DiversificationThe Disposition EffectLottery PreferencesNoise TradersPortfolio InertiaRecency Bias
6Markets and Anomalies
Mania, Panic and CapitulationMarket EfficiencyEfficient Market Hypothesis vs…Speculative BubblesReflexivityInvestor SentimentMarket AnomaliesShort-Sale ConstraintsPrice DiscoveryLimits to Arbitrage
7Decision, Research and Debiasing
The Decision JournalDebiasingChoice Architecture, Defaults and…The Pre-Mortem and Process QualityDecision Quality
8Advice, Conduct and Communication
Communication ConductSuitability and AppropriatenessChoice OverloadComplaint BehaviourRisk DisclosureVulnerable Investors

Status Quo Bias and the Default Effect: The Cost of Doing Nothing

Status quo bias is a preference for whatever state a decision is already in, held more strongly than the merits of that state justify. The default effect is what appears when somebody else selected that state. Both produce the same record, nobody moved, and separating them decides whether a take-up figure describes what people want or what was arranged for them.

Doing nothing is a choice with consequences, and it is the only choice that never feels like one. Every arrangement a person is inside has some state it occupies when nobody acts. A monthly instruction keeps running. A scheme keeps holding what it holds. A connection keeps renewing on the same terms it renewed on last time. The state was selected by somebody, or it fell out of a process nobody examined. For the person inside it, the two amount to the same thing. Once the state an arrangement occupies when nobody acts becomes visible, a large amount of behaviour stops looking like preference and starts looking like design.

What is status quo bias, and what is being preferred?

Status quo biasPreferring the current state beyond what its merits justify. is a preference for the current state of an arrangement, held over and above whatever is genuinely good about that state. The last five words are the ones that get dropped, and dropping them makes the idea useless. If the current arrangement really is the best of the available options, then remaining in it is not a bias at all. Remaining is then a correct decision that happens to require no movement, and calling it a bias would mean calling every well-taken decision a bias whenever the answer came out as stay. The bias is only the extra weight: the amount by which the current state wins beyond what its own merits earn it.

Staying put, taken apart: what the merits earned, and what they did not. WHAT THE MERITS EARN THE EXTRA WEIGHT this shaded part, and only this part, is what the word bias names CURRENT STATE WINS FAIRLY the alternatives were examined and the current arrangement won on merits so no bias is present CURRENT STATE WINS ANYWAY the alternatives were better on their merits and the current one still won the whole margin is bias PART EARNED, PART EXTRA the current arrangement won, and won by more than its merits could earn part decision, part bias The widths above are illustrative. Remaining is only a bias where the current state wins by more than it earns.
Only the shaded portion beyond what the merits earn is what the word bias actually names.

Samuelson and Zeckhauser set this out in the Journal of Risk and Uncertainty in 1988, and the design of the work is what makes the finding hard to argue with. Put the same set of options in front of people. Then change one thing only. Change which of those options is described as the one already in place. Watch the answers move. If the first option beats the second when the first is the one already in place, and the second beats the first when the second is the one already in place, then whatever is doing the work is not the first option and it is not the second. The word doing the work is already.

Take it out of finance before taking it back in. A household has bought milk from the same vendor for eleven years. Asked why, the answer comes back as a list: he is reliable, he comes early, the account is settled monthly without fuss. Every item on that list may be true. A list always exists, so the test is not whether the list exists. The test is what happened the last time a second vendor started on the same street. If nobody in the household looked, the list was assembled afterwards to explain a position that was already being held. In status quo bias the position itself is what is preferred, and the reasons arrive later to keep the position company.

Eleven years of one vendor, and where the reasons came from. ELEVEN YEARS AGO the vendor is chosen SOME TIME LATER a second vendor opens on the street NOBODY LOOKS no comparison is made by anybody ASKED WHY, TODAY reliable, early, settled monthly the reasons were assembled afterwards, to explain a position already held THE LIST ALWAYS EXISTS, SO THE EXISTENCE OF THE LIST PROVES NOTHING the test is what happened on that street when a second option appeared
The reasons run backwards to a position already held, so their existence tests nothing at all.
The same two options, twice. Only the label moved. ROUND ONE: A IS THE ONE ALREADY IN PLACE OPTION A the terms, the cost and the cover CURRENT OPTION B a different mix of the same three MOST PEOPLE END UP WITH A and give reasons about A ROUND TWO: B IS THE ONE ALREADY IN PLACE OPTION A the terms, the cost and the cover OPTION B a different mix of the same three CURRENT MOST PEOPLE END UP WITH B and give reasons about B Nothing about either option changed between the panels. The tag marked CURRENT is the only thing that moved.
Moving the tag that marks which option is already in place moves the answers with it, which is why the thing being preferred cannot be either option.
Try it out

In status quo bias, what is actually being preferred?

What is the default effect, and who chose the current state?

A defaultThe state an arrangement occupies when nobody does anything. is the state an arrangement occupies when nobody does anything. Every arrangement has one, whether or not anybody sat down and picked it. A monthly instruction either runs or it does not run when the date arrives and nobody has touched it. A person is either inside a scheme or outside it on the morning they take no action at all. There is no third setting in which the arrangement waits politely until somebody decides.

The default effectThe large influence a default has on where people end up. is the influence that setting has on where people finish. The default effect is not the same idea as status quo bias, and the difference is worth holding onto. Status quo bias is a statement about a person: this person weights the current state too heavily. The default effect is a statement about an arrangement: this arrangement sends most people to one particular end state, whatever they may or may not weight. Status quo bias is a fact about a mind, and the default effect is a fact about a process, and the second one is the one somebody built.

The same behaviour, described twice: once about a mind, once about a process. STATUS QUO BIAS a statement about a person one mind weighting the current state more heavily than earned WHERE IT LIVES inside the person WHO BUILT IT nobody built it THE DEFAULT EFFECT a statement about an arrangement a process that sends most of the people to one end state WHERE IT LIVES in the arrangement WHO BUILT IT somebody, or a process left alone THE SECOND ONE IS THE ONE SOMEBODY BUILT and building it was a choice, whether or not it felt like one at the time
One idea describes a mind and the other describes a process, and only the process was built by somebody.

Two studies are the ones to name. Madrian and Shea, in the Quarterly Journal of Economics in 2001, examined what happened to a saving arrangement when the state it occupied for a person who did nothing was flipped from outside to inside. Johnson and Goldstein, in a paper called Do Defaults Save Lives in Science in 2003, compared arrangements that differed in whether a person had to act in order to be included or act in order to be excluded. Both report differences much larger than anybody expected before the work was done. How large the difference runs depends on the arrangement studied, so a magnitude carried away from one of these studies travels badly to the next.

Two papers named in full, and the one field left blank. MADRIAN AND SHEA, 2001 Quarterly Journal of Economics what happened to a saving arrangement when the state occupied by doing nothing was flipped from outside to inside EFFECT SIZE: NOT STATED HERE JOHNSON AND GOLDSTEIN, 2003 Do Defaults Save Lives, Science arrangements differing only in whether a person had to act to be included or act in order to be excluded EFFECT SIZE: NOT STATED HERE Both are findable at ssrn.com and nber.org. Read the magnitude at source and confirm it there.
Both papers are named in full, and the size of the difference each reports belongs with the arrangement each studied.
One person, one identical wish, two arrangements. ROW ONE: JOINING REQUIRES AN ACTION the same person, mildly in favour, never sure DOES NOTHING no form, no reply ENDS UP OUTSIDE IT and is recorded as not wanting it ROW TWO: LEAVING REQUIRES AN ACTION the same person, mildly in favour, never sure DOES NOTHING no form, no reply ENDS UP INSIDE IT and is recorded as wanting it Same person, same wish, same absence of action. The two records disagree completely.
A person who does nothing lands outside one arrangement and inside the other, so the record of where people ended up is a record of how the arrangement was built.

Status Quo Bias vs Inertia: is there a real difference?

Yes, and it is the difference between a preference and the absence of one. Status quo bias means a person considered the alternatives, in some rough way, and came out preferring where they already were, with the current state carrying more weight than it earned. InertiaNot acting, without any preference for the current state being involved. means nothing of the sort happened. Nobody weighed anything. The alternatives were never brought into view, so no preference over them was ever formed, and the person stayed where they were for the same reason a parked vehicle stays parked.

Now the uncomfortable part. Consider what each of those two people leaves behind in any record. The first leaves no change. The second leaves no change. A record stores what moved, and neither of them moved, so the record is character by character identical. An hour of staring at it will not resolve the question. Status quo bias and inertia are distinguishable in principle and indistinguishable in evidence, unless somebody goes and asks.

The identity of the two records is not a philosophical complaint. The identity changes what a person is entitled to conclude from a record, and what they would have to do to conclude more. If a survey of 60 investors shows that most of them made no change to a standing instruction across eight quarters, the honest description is that no change was recorded. Everything beyond that, every sentence about what those investors wanted or valued or were comfortable with, is being supplied by the reader rather than by the record.

Two different people. One identical row at the bottom. STATUS QUO BIAS ALTERNATIVES EXAMINED yes, at least roughly PREFERENCE FORMED yes, and it favours staying WHAT THE RECORD SHOWS no change recorded INERTIA ALTERNATIVES EXAMINED no, never brought into view PREFERENCE FORMED none at all, on either side WHAT THE RECORD SHOWS no change recorded THE BOTTOM ROW IS IDENTICAL IN BOTH PANELS so no amount of reading the record will separate the two people above it
The top two rows differ completely while the recorded row matches exactly, which is why separating a preference from an absence of one needs a question rather than a report.
Try it out

Somebody never considered the alternatives at all and stayed where they were. Is that status quo bias or inertia?

Why does the distinction decide who is responsible?

Because the two descriptions point at different people. If a person examined the alternatives and preferred where they were, the decision belongs to that person and the only remaining question is whether the weighting was sound. If a person never examined anything, the position they occupy was determined by whoever set the state the arrangement sits in when nobody acts. The person supplied the absence of action. Somebody else supplied the destination that absence leads to.

The same blank record, and the two different people it can belong to. THE RECORD SHOWS: NO CHANGE identical in both cases below THE ALTERNATIVES WERE EXAMINED the decision belongs to the person who actually took it THE ONLY QUESTION LEFT was the weighting sound? NOTHING WAS EXAMINED AT ALL the person supplied only the absence of any action WHO SUPPLIED THE DESTINATION whoever set the state it sits in THE DISTINCTION LOCATES WHERE A CHOICE WAS MADE it is not a matter of picking the right label for a person
One blank record has two owners, and only in the second case did somebody else supply the destination.

The two ideas are almost always taught together, and almost always confused. Confusing them moves responsibility silently. To describe a room full of inertia as a room full of preference is to credit every person there with a decision they never took, and quietly to excuse whoever built the arrangement from having made one. The distinction is not about labelling a person correctly, it is about locating where a choice was actually made.

Consider Meera Sundaram, an invented investor. A standing instruction of Rs 25,000/- a month goes into her arrangement. Suppose she never pauses it across eight quarters. Two readings are available. Either she examined it, thought about the amount and left it where it was, and leaving it was a decision. Or the date arrived twenty four times and nothing happened, and nothing happening is not a decision. Devika Rao, the adviser at Palash Advisory Services Private Limited, cannot tell from the record which of those two she is looking at, and any conclusion she reaches about Meera Sundaram from that record alone is a conclusion she has invented.

Twenty four monthly dates, and the single row they all produce. Rs 25,000/- by standing instruction, across eight quarters, with no pause recorded. month 1 month 24 Rs 25,000/- times 24 monthly dates is Rs 6,00,000/- moved and Rs 25,000/- times 12 months is Rs 3,00,000/- in a single year READING ONE she examined it each time and left the amount where it was which is a decision READING TWO the date arrived twenty four times and nothing happened which is not a decision THE LOG HOLDS THE SAME ROW FOR BOTH READINGS so nothing about which one it was can be drawn out of it
Twenty four unbroken monthly dates move Rs 6,00,000/- and still leave two opposite readings open.

How large is the default effect, and how would anybody know?

Large enough that the honest answer depends almost entirely on one thing, and the one thing is how much it costs somebody to leave. The cost of leaving is worth a name. Call it frictionWhat it costs in effort or time to move away from the default.: the effort, the time, the form, the phone call, the small dread of getting it wrong. Friction has nothing to do with whether the arrangement is good. Friction is a property of the exit, not of the thing being exited.

The scale below is not a measurement of anything. Its numbers are chosen so the shape can be seen rather than argued about. Take a population whose underlying preferences are exactly even, half of them genuinely preferring the arrangement and half genuinely preferring the alternative. The even split is stipulated, not measured. Stipulating it gives something fixed to watch the reading move against. Now change only the cost of leaving. When leaving is free, 50.0 per cent remain, exactly what an even split looks like. Add a quarter of the full friction and 60.0 per cent remain. At half, 70.0 per cent. At three quarters, roughly what a form and a short delay feel like, 80.0 per cent remain. At full friction, where leaving is genuinely awkward, 90.0 per cent remain.

Five settings of one dial, with the preference held rigidly still. the preference, held fixed at 50.0 the part added by the cost of leaving 0 50 50.0 50.0 free 50.0 +10.0 60.0 a quarter 50.0 +20.0 70.0 half 50.0 +30.0 80.0 three quarters 50.0 +40.0 90.0 awkward Every pine block is the same height, because the preference is stipulated at 50.0 and never moves. Invented scale.
The pine block never changes height, so every point above 50.0 was added by the cost of leaving.

The comparison between the two ends is where the point sits. The reading climbs from 50.0 to 90.0, a movement of 40 points. Not one of those 40 points came from anybody preferring anything, because the preferences were held exactly even by construction at every single setting. The 40 points came from the exit. A reader handed only the final number, 90.0 per cent, and told nothing about the cost of leaving, would be looking at a measurement of a door and calling it a measurement of a wish.

The share remaining climbs. The preference underneath it never moves. 100 90 80 70 60 50 40 50.0 60.0 70.0 80.0 90.0 UNDERLYING PREFERENCE, HELD FIXED AT 50.0 PER CENT free a quarter half three quarters awkward Vertical axis: share remaining, per cent. Horizontal axis: the cost of leaving. Invented and illustrative throughout.
Across the whole scale the shaded gap is the part of the reading produced by the cost of leaving, and it reaches 40 points while the preference underneath stays exactly even.
Try it out

The underlying preferences are exactly even, half and half, at every setting. Before the control below is moved: what share remain in the arrangement when leaving is awkward?

Play with it

Make leaving harder and watch a preference appear that was never there

One variable moves: how costly it is to move away from the arrangement, from free at the left to awkward at the right. One thing is held rigidly still: the underlying preference, stipulated at exactly 50.0 per cent, drawn as the flat line and as the second bar. The control starts three quarters of the way along, giving 80.0 per cent remaining against a true 50.0 per cent, and pushing it to the far right gives 90.0 per cent.

free to leavethree quartersawkward to leave
One reading moves. The preference underneath it is nailed down. AT THIS SETTING ACROSS EVERY SETTING 80.0 50.0 OBSERVED share remaining PREFERENCE held fixed 100 80 60 40 80.0 PREFERENCE, FIXED AT 50.0 free half awkward the cost of leaving
Cost of leaving, what moves
three quarters
Share remaining
80.0 per cent
Held constant, the preference
50.0 per cent
Points produced by friction
30.0

With leaving set at three quarters, 80.0 per cent remain in the arrangement while the underlying preference stays at 50.0 per cent, so 30.0 of those points were produced by the cost of leaving and none of them by anybody preferring it.

Educational illustration. The share remaining is 50 per cent plus 40 points multiplied by the cost of leaving, on a made-up scale chosen so the shape can be seen. The underlying preference is stipulated at exactly 50.0 per cent and never moves, at any setting. Every number in the scale is stipulated rather than measured.

Why does a default reveal so little about what people want?

Because the reading available is the sum of two things and only the total is ever handed over. One part of it is what people prefer. The other part is what the exit costs. Added together they give a share remaining, and the share remaining is the number that gets quoted. There is no way to run the addition backwards from the total alone. Any pair of parts that sums correctly is consistent with the total shown.

One reading of 80.0 per cent, and three worlds that all produce it. WORLD ONE preference 80.0 friction 0.0 WORLD TWO preference 65.0 15.0 WORLD THREE preference 50.0 30.0 every bar ends at exactly the same place, 80.0 per cent ONLY THE TOTAL IS EVER HANDED OVER and no arithmetic recovers the two parts from the one number
Three different splits sum to the same 80.0 per cent, so the total cannot say which world produced it.

The gap between a choice and an absence of one is what makes revealed preferenceAn ordering read from what somebody chose rather than from what they said. such a delicate tool in this particular setting. Reading an ordering out of what somebody chose is a reasonable move when a choice was actually made. When the outcome was produced by an absence of action, there was no choice to read anything out of, and the ordering that gets written down is being inferred from a door rather than from a person. A default converts the absence of a decision into what looks exactly like the record of one.

Reading an ordering out of a choice, and out of an absence. A CHOICE WAS ACTUALLY MADE WHAT HAPPENED the options were put side by side and one of them was picked WHAT CAN BE READ OUT an ordering, and it is genuine NO CHOICE OCCURRED AT ALL WHAT HAPPENED nobody compared anything, and the arrangement produced the outcome WHAT GETS READ OUT ANYWAY an ordering, inferred from a door A DEFAULT CONVERTS THE ABSENCE OF A DECISION into something that looks exactly like the record of one
An ordering read out of an absence of action is inferred from a door rather than from a person.

So which figure would carry information? The share who remained when leaving was free. At zero friction the exit adds nothing, so the reading is the preference and nothing else. The zero-friction share is the number worth having, and it is also the number almost nobody has. Almost no arrangement in the world makes leaving free. Forms exist. Notice periods exist. The half hour on a phone line exists. The informative measurement is the one the arrangement is least likely to have produced.

Take the friction back out and the reading falls to what it started as. 0 50 100 90.0 minus 40 50.0 EASY TO MEASURE the share who remained NEVER RECORDED produced by the cost of leaving WORTH HAVING what preference alone would give
The observed 90.0 per cent is one number carrying two ingredients, and the 40 points contributed by the cost of leaving are the ingredient no arrangement writes down.
Try it out

Which single figure would actually carry information about what a group of people prefer?

What does the decision log show when nobody acts?

Now put the idea against a record instead of a scale. The Palash decision log is an account of 240 decisions taken by 60 investors across eight quarters. Sorted by kind, it holds 96 buys, 84 sells, 36 switches and 24 pauses of a standing instruction, and those four counts add to 240 exactly. The last of the four is the one that matters here.

Twenty four pauses out of 240 logged decisions is 10.0 per cent. Turn it over and the other side is the interesting side. Taking 24 from 240 leaves 216 occasions on which a standing instruction was left alone, and 216 out of 240 is 90.0 per cent of the chances anybody had to interrupt one. Written down like that, 90.0 per cent looks like a finding. The 90.0 per cent is not a finding about people but a count of the occasions on which nobody touched the arrangement.

What the log holdsWorkingFigure
Buys recordedacross 60 investors and eight quarters96
Sells recordedacross the same 60 investors84
Switches recordeda holding exchanged for another36
Pauses of a standing instructionsomebody acted to stop it running24
Total logged decisions96 plus 84 plus 36 plus 24240
Pauses as a share24 divided by 24010.0 per cent
Instruction simply ran240 less 24, then divided by 240216, or 90.0 per cent

To read that 90.0 per cent as evidence that those investors wanted their instructions to run is to make, in one move, exactly the error named here. The instruction running is what happens when nobody does anything, so a count of it is a count of absences and an absence has no opinion in it. The log has columns for what was bought, what was sold and when. The log has no column for whether anybody thought about the instruction and decided to let it stand. No such column was ever kept, and no amount of care with the columns that were will reconstruct it. One log is one log, and a single record is not evidence that any rule holds generally.

The record, and the column it does not have. PALASH DECISION LOG, EIGHT QUARTERS Buys 96 Sells 84 Switches 36 Pauses of a standing instruction 24 Total logged decisions 240 THE COLUMN THAT DOES NOT EXIST whether anybody considered the instruction and then decided to let it stand 24 of 240 decisions were pauses, which is 10.0 per cent of every chance to interrupt an instruction. The other 216 are the instruction simply running, which is 90.0 per cent and needs nobody at all. Reading that 90.0 per cent as a wish is the error: the log records the arrangement, never the wanting. Invented log, illustrative throughout. 96 plus 84 plus 36 plus 24 equals 240.
The four kinds of logged decision add to 240, so the 24 pauses leave 216 occasions on which nobody acted and the instruction ran on its own.
Try it out

The standing instruction ran in 90.0 per cent of the occasions on which somebody could have paused it. Is that evidence the investors wanted it to run?

What happens when a take-up figure is read as a preference?

Here is the failure in its full form, and it is worth slowing down for. Suppose an analyst is told that 90 per cent of a group are in a particular arrangement, and that the arrangement was the state they occupied unless they acted. The question is what that figure says about what those people want. The answer is close to nothing, and the reason is that at least three quite different groups of people would generate that identical figure.

Three populations that cannot be told apart by the number they produce. ALL OF THEM WANTED IT wanted it each one weighed it and came out in favour ALL OF THEM WERE INDIFFERENT no view either way weighed it and found nothing between them MOST NEVER CONSIDERED IT never looked a few weighed it, the rest never saw the question ALL THREE PRODUCE THE SAME RECORDED FIGURE the share still in the arrangement, with nobody having changed anything AND EACH ONE CALLS FOR A DIFFERENT RESPONSE leave it entirely alone, look again at whether it still suits them, or ask the question nobody asked
One recorded figure is consistent with wanting, with indifference and with never having looked, and the three call for responses that have nothing in common.

The error that gets made, and what it costs

The error is reading a take-upThe share of people in an arrangement, which says nothing on its own until the default is stated alongside it. figure as though it were a preference. The error is made by capable people in good faith, and it is made because the figure is easy to obtain, arrives with a decimal point on it and looks like evidence. Ninety per cent of them are in it, so ninety per cent of them must want it.

The cost is that the response chosen is right for one of the three groups and wrong for the other two. If they genuinely wanted the arrangement, leaving it alone is correct and asking again is a waste of everybody's attention. If they were indifferent, the arrangement is doing no harm but it is also carrying no information, so nothing about it should ever be cited as a preference. If most of them never considered it, the correct response is the one nobody chose. Put the question in front of them once, plainly, and see what happens.

One response chosen, and the three populations it can land on. THE RESPONSE CHOSEN: LEAVE IT ALONE, THEY MUST BE COMFORTABLE THEY GENUINELY WANTED IT each one weighed it and agreed CORRECT nothing more to do THEY WERE ALL INDIFFERENT the arrangement carries no information EMPTY never cite it as evidence MOST NEVER CONSIDERED IT the question was never put to them WRONG ask the question once, plainly RIGHT FOR ONE OF THE THREE, WRONG OR EMPTY FOR THE OTHER TWO and the figure on its own cannot say which of the three it describes
The comfortable response is correct for one population, empty for another and wrong for the third.

There is a plain rule that follows and it does not need hedging. Anybody who quotes a take-up figure without stating what the state was when nobody acted has quoted a design decision and called it a preference. The figure is not wrong. The label on it is.

Try it out

Ninety per cent of a group are in an arrangement, and that arrangement was the state they occupied unless they acted. How much does that say about what they want?

Who chooses the default, and on what basis?

Somebody always does. The claim is more contested than it sounds. The usual objection is that plenty of arrangements were never designed at all. They grew. Nobody sat in a room and picked the state a person occupies when they do nothing. The objection is true about the room and false about the outcome. An arrangement with nobody minding it still occupies some state when nobody acts, and the state it occupies is whatever the process happened to produce: the setting the software shipped with, the form that was easiest to print, the instruction the previous person left running.

So the choice was made either way. Declining to make it, even on purpose, does not leave the position empty. Not choosing a default is not an alternative to choosing one, it is choosing whichever state falls out of the process, without looking at it. Once that is accepted, a second question becomes unavoidable: on what basis should whoever sets that state be setting it, and what do they owe the people it applies to? Thaler and Sunstein set out the design question under the name choice architecture in Nudge in 2008, and choice architecture takes up how a default gets designed, tested and justified.

Three ordinary ways a default gets set with nobody deciding anything. THE SOFTWARE SETTING whatever the system shipped with THE EASIEST FORM the version that was simplest to print THE PREVIOUS PERSON the instruction they left running THE STATE THE ARRANGEMENT OCCUPIES WHEN NOBODY ACTS which is where everybody who does nothing will end up NOT ONE OF THESE INVOLVED A ROOM, AND ALL THREE MADE A SELECTION declining to choose does not leave the position empty, it fills it by accident
A default nobody sat down to pick was still selected, by a process rather than by a decision.
Every arrangement occupies one of these when nobody acts. ANY ARRANGEMENT AT ALL, DESIGNED OR NOT STATE ONE available, needs an action STATE TWO occupied by doing nothing STATE THREE available, needs an action no action taken, so this is where it sits Somebody selected which of the three is the middle one, or a process did it unattended. DECLINING TO SET ONE DOES NOT REMOVE IT it hands the selection to whatever the process happens to produce
An arrangement always sits in some state when nobody acts, so the only real question is whether the state it sits in was selected deliberately.
India

Where a duty attaching to a default would be found

Where an arrangement is set up by a regulated intermediary and applies to other people's money, the requirements covering conduct, suitability and what must be disclosed to the person affected are matters for the Securities and Exchange Board of India, at sebi.gov.in. Thresholds, periods and rates are set there, and none should be inferred from anything above. The current requirements should be confirmed at the source before any of them is relied on, and the duty attaching to whoever sets a default is covered under suitability and appropriateness.

Try it out

Can an arrangement have no default at all?

When is staying put the right answer?

Often, and often enough that it needs saying without hedging. An account of the cost of doing nothing is easily misread as a case for moving, and it is nothing of the sort. Movement has costs of its own, and those costs are measured under excess trading. Staying put is right whenever the alternatives were examined and the current arrangement won on its merits. Remaining on the merits is not status quo bias. Remaining on the merits is a decision whose answer happened to be stay.

So the useful question is not whether somebody stayed. The useful question is when the alternatives were last examined. A clear and recent answer to that question turns staying put into a decision, and the absence of an answer means the arrangement was simply running. Notice that the question is answerable. The answer has a date in it. Answering it needs no survey and no introspection about preferences, and introspection is the thing people are worst at. Meera Sundaram can answer it in about four seconds about her own standing instruction of Rs 25,000/- a month. The instruction moves Rs 3,00,000/- across twelve months and is therefore not a small thing to leave unexamined. The answer is either a date or a silence.

One question, asked about the arrangement rather than the person. WHEN WERE THE ALTERNATIVES LAST EXAMINED? the answer is either a date or a silence A CLEAR, RECENT DATE NO ANSWER AT ALL STAYING PUT IS A DECISION the alternatives lost on their merits, and that is a checkable claim THE ARRANGEMENT IS RUNNING nothing was weighed, so nothing was preferred by anybody Both branches leave the same trace in any record that only stores what changed. The question is the only thing that separates them, and somebody has to ask it.
Asking when the alternatives were last examined separates a decision to stay from an arrangement that merely kept running, which no record can do by itself.
Try it out

Which single question separates a decision to stay from an arrangement that is simply running?

How does a practitioner read a take-up figure without recommending anything?

Devika Rao, the adviser at Palash Advisory Services Private Limited, receives a figure saying that most of the people in an arrangement are still in it. The first thing she does with that figure is refuse to do the obvious thing with it. She does not write that the clients are comfortable, she does not write that the arrangement suits them, and she does not write that it should therefore be left alone. Each of those sentences converts a count of absences into a claim about minds, and none of them is supported.

She writes three lines instead, and the three lines are the practical form of everything above. First, what was the state when nobody acted, stated plainly. A share remaining is meaningless until the reader knows what it is a share of. Second, what did leaving cost: was there a form, a notice period, a call to make, a fee. Third, when was this last put in front of the people it applies to, with a date if one exists. The three lines turn an uninterpretable figure into an interpretable one, and none of them requires knowing what anybody prefers.

The note she writes, and the three sentences she refuses to write. WHAT GOES IN THE NOTE 1 THE STATE WHEN NOBODY ACTED stated plainly, before any share is quoted 2 WHAT LEAVING ACTUALLY COST a form, a notice period, a call, a fee 3 WHEN IT WAS LAST PUT TO THEM with a date on it, if a date exists WHAT SHE WILL NOT WRITE the clients are comfortable a count of absences, not of minds the arrangement suits them suiting is not what was measured it should be left alone that is advice, and it is not hers NONE OF THE THREE LINES NEEDS TO KNOW WHAT ANYBODY PREFERS which is what makes them writable without recommending anything
Three writable lines replace three struck out sentences that each convert an absence into a claim.

A person deciding alone, with no adviser and no committee, runs the same three lines on their own arrangements once a year, and it takes a short evening. Which arrangements are running by themselves. What would it cost to stop one. When did I last look. The exercise usually produces no changes, and usually should not. The value is that afterwards the things still running are running because a person looked at them, and that is a different state of affairs from the evening before, even where every arrangement is identical.

What does the distinction settle, and what does it leave open?

One job has been done and one only. A preference for the current state has been separated from the absence of any preference, the two have been shown to be identical in evidence, and a figure describing where people ended up has been shown to be a figure about an arrangement rather than about the people inside it. The separation is a judgement about what evidence can carry, and it stops precisely there.

Three questions stand next to this one and are answered elsewhere. How a default is designed, tested and compared against alternatives is set out by Thaler and Sunstein in Nudge in 2008, and taken up under choice architecture. The duty attaching to a person or a practice that sets a default for somebody else is a conduct question, taken up under suitability and appropriateness, where the requirements can be sourced properly rather than gestured at. And what happens to a holding over long stretches of time, in the form of activity that never occurs, is taken up under portfolio inertia. The whole of the claim is that the choice exists and that somebody made it, and no smaller claim would still change how a take-up figure should be read.

What this guide settles, and the questions it hands to other sequences. WHAT THIS GUIDE ESTABLISHES that the choice exists, and that somebody made it, and nothing beyond that HOW ONE IS DESIGNED drafted, tested and compared with others taken up under research and design WHAT DUTY ATTACHES to whoever sets one for other people taken up under advice and suitability WHAT NEVER TRADING DOES to a holding over long stretches of time taken up where activity and its costs are measured AND ONE SHAPE COVERED SEPARATELY a plan made and then reversed when the moment fell due, which is a different piece entirely
Only one thing is settled, that the choice exists, and the design and duty questions belong elsewhere.

One last caution, and it is the one most easily lost. No default is good or bad in itself. A default is good or bad only against what the people it applies to would have chosen had somebody asked them, and the claim being made about defaults throughout is a claim about evidence: a share remaining is not a preference, and reading it as one attributes a decision to people who may never have taken it.

How a default is drafted, tested and defended is covered separately under choice architecture. The conduct duty that attaches to whoever sets a default for other people is covered separately under suitability and appropriateness, where the requirements, thresholds and periods can be sourced properly. A holding that is never traded is covered under portfolio inertia. The reversal of a plan at the moment it becomes due is covered under present bias, and it is a different shape entirely: a plan made and then abandoned, against a plan never examined at all.

Sources

SourceDocumentSite
Samuelson and Zeckhauserthe 1988 paper naming and measuring status quo bias in decision making, Journal of Risk and Uncertaintyssrn.com
Madrian and Sheathe 2001 paper on what happens to a saving arrangement when the state occupied by doing nothing is changed, Quarterly Journal of Economicsssrn.com
Johnson and GoldsteinDo Defaults Save Lives, Science, 2003nber.org
Thaler and SunsteinNudge, 2008, where the design question is set out under the name choice architecturecited to the book itself
Securities and Exchange Board of Indiaconduct, suitability and disclosure requirements applying to registered intermediariessebi.gov.in
Association of Mutual Funds in Indiainvestor-facing practice material on how arrangements are presented to investorsamfiindia.com

Meera Sundaram, Devika Rao, Palash Advisory Services Private Limited, the Palash decision log and the friction scale are invented.
Educational material. Not advice on any investment, tax, budget or market position.

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