Speaker 1: So here, let me pour you a cup of hot chocolate here. And then here you go. Some whipped cream on top.
Speaker 2: OK, thank you. That's enough.
Speaker 1: There you go. All right.
Katy Milkman: We're at a university food court to test how people react to two slightly different scenarios. In the first scenario, we're offering students a free hot chocolate with whipped cream—but explaining they're welcome to order it plain if they prefer it that way.
Speaker 1: All right, we're ready for you. If you'd like a cup of hot chocolate with whipped cream.
Speaker 4: Thank you.
Katy Milkman: In the second scenario, we're offering free hot chocolate without whipped cream—but inviting people to add it if they'd like. It's just not automatically included.
Speaker 5: All right. Thank you.
Speaker 1: So how is it? How's the hot chocolate?
Speaker 5: It's really good, actually. Yeah.
Katy Milkman: The whipped cream is available in both scenarios and we conveyed that clearly to everyone, but a surprising thing happens when it's described as an extra rather than a standard offering. Very few people choose to add it to their drink.
Speaker 6: Thank you.
Speaker 1: Why did you decide not to get whipped cream on your hot chocolate?
Speaker 6: Because I don't think it's necessary for a delicious hot chocolate.
Katy Milkman: This little experiment was inspired by a similar one conducted by Mary Steffel, Elanor Williams, and Ruth Pogacar. What's interesting about it is that we can assume at least some of our volunteers aren't huge whipped cream lovers, but very few who were in the first scenario turned it down. By contrast, only a small percentage of people who had to request whipped cream as an add-on chose to do so. It's a subtle difference, but for the most part, people stuck with what they were offered, even though it was trivial to turn down the whipped cream in the first scenario or to add it in the second. Why is that?
Today on the podcast, we're exploring how defaults, or the options you'll end up with if you don't take any initiative, can influence people's decisions around simple things like a dollop of whipped cream or the complex business landscape of the early internet. I'm Dr. Katy Milkman, and this is Choiceology, an original podcast from Charles Schwab. It's a show about the psychology and economics behind our decisions. We bring you true stories involving high-stakes choices, and then we explore the latest research in behavioral science to help you make better judgements and avoid costly mistakes.
Eric Sink: All right. Hello. My name is Eric Sink. I'm a software developer. I worked in the mid-'90s for a company called Spyglass.
Katy Milkman: Eric led a software development team, which worked on a famous web browser.
Eric Sink: We built the first versions of the browser that later became known as Microsoft Internet Explorer.
Katy Milkman: The World Wide Web was new in the mid-1990s. Text-based email had been around for a while, but the internet was mostly used by computer hobbyists and large institutions. Even so, a few tech companies had a sense that the web had huge commercial potential.
Eric Sink: Well, it was clear from the beginning that the web was going to be big. I think many of us didn't understand how big. Certainly if you had told me then what the web would be like in 2020, I would have been shocked, but we knew it was a big thing. We also knew that it was an opportunity that Spyglass really wanted to be a part of.
Katy Milkman: Spyglass licensed code from something called the NSCA Mosaic Project, an early web browser used mostly by academics, and they built new software on that code base.
Eric Sink: And once we had made that transition, we started signing up a great deal of customers.
Katy Milkman: One of their new clients was a little company called Microsoft. Microsoft was the dominant force in personal computing at the time, but it was late to the web-browsing party. At the time, a small Silicon Valley–based startup had a substantial lead in the browser space. That market leader was Netscape Communications, another company building on the early Mosaic code. Netscape's Navigator browser was released as a public beta and quickly gathered fans.
Speaker 8: The night that we sort of turned it on live for download, one of the engineers had wired it together so that every time there was a download, a cannon shot would go off.
Katy Milkman: A cannon sound effect. That's a clip from an internal communications video that Netscape produced. The excitement of those early days is evident in many of the interviews with employees and managers. You'll hear a few more clips from that video sprinkled throughout this episode. By Version 1.0, Navigator was the most popular web browser in the world, and the company was growing like crazy.
Speaker 9: For all of 1995, we were second only to Windows 95 in sales at retail. The momentum behind Netscape was just not something anybody could control, anticipate.
Katy Milkman: There were many reasons Netscape rose to dominate the browser market. Their browser had lots of great features that were novel at the time, like the ability to display documents and images while pages were loading, as opposed to waiting until the page had fully loaded. Many of the core technologies Netscape pioneered are still in use today. At the time, Microsoft was primarily focused on their Windows operating system and Office software, but that was about to change. Here's Eric Sink again.
Eric Sink: Certainly folks at Microsoft, like many of us, realized early on that the web had the potential to be very big. In the case of Microsoft, though, their perspective would have been one of playing defense, because they saw the web as a paradigm shift, and they were utterly dominant in the current paradigm, so it would have been natural for them to feel threatened and to want to play defense.
Katy Milkman: And they were playing defense against a scrappy, agile competitor in Netscape Communications.
Eric Sink: Netscape Navigator 1 was released in the fall of 1994. It was still fairly basic. All the first generation browsers were, but it was also probably the first commercial browser out there.
Katy Milkman: Netscape was staking a claim to the commercial potential of the web, and they were well ahead of the competition, with a blockbuster IPO and millions of users.
Speaker 9: And the excitement in the company was just, it was just palpable. It was just amazing. Everybody was trying not to watch the stock, but you couldn't, kind of, help it because everybody was talking about it everywhere.
Katy Milkman: Netscape hadn't come close to demonstrating profitability, but the stock skyrocketed from the initial $20 per share to $58 per share on its first day of trading. The closing price that day valued the web browser at around $3 billion. By the end of 1995, Netscape was trading at $174 a share. Here's Eric Sink again.
Eric Sink: At the pace at which everything was moving in that industry, a six- to 12-month lead seemed like an eternity, and they were out there first and started gathering users very quickly.
Katy Milkman: Netscape had an early advantage in web browsing, but for the average person it was still a somewhat challenging process to even get on the web. These were early days.
Eric Sink: You would have had to get internet access from somewhere, and these were the days when you were using a modem.
Katy Milkman: In the '90s, modems mostly operated over telephone lines and were crazy slow. To give you a sense of just how slow, here's a little context. If Netflix had been streaming movies in the '90s, it would have taken over 100 hours to download a single film.
Eric Sink: So you would have to have internet access from a company such as, say, AOL. You would download a browser separately because it would not be part of the installation of the computer you just bought. In many cases, you didn't already have the components of the operating system that lets you do internet on your system, so you would probably have to reconfigure your computer and then get internet access, then get a browser. So it was a multistep process, and it frankly was not a process that a lot of normal people did. It was still rather oriented towards the tech enthusiast.
Katy Milkman: This was the rather clunky state of internet browsing at the time. Several companies realized that the process was ripe for improvement. One of those companies was Microsoft.
In 1995, Microsoft licensed the necessary code for making web browsers from Spyglass, the company where Eric Sink worked. The code became the basis of Microsoft's first browser, Internet Explorer 1.0, which was released as an add-on to its Windows 95 operating system.
Eric Sink: Internet Explorer 1 would have come out in late '95, summer of '95, and then just a few months later they released Internet Explorer 2. They were moving fast because they knew they were behind. They had basically granted Netscape a significant head start of six to nine months, so they were in a hurry. I believe internet Explorer 1 was originally sold as part of the Microsoft Plus pack for Windows 95, and you could probably buy that at the store where you bought your computer as a separate disc.
Katy Milkman: This is a key point. As a user, you still had to buy Internet Explorer as a separate piece of software and then install it yourself, and most web users at the time were already using Netscape.
Eric Sink: Well, at this point, it's largely Netscape. Microsoft was playing catch up. Netscape's browser share at the time was in the vicinity of 90% because they were the de facto standard.
Katy Milkman: Netscape's early entry into the browser market left Microsoft in the dust. If they were ever going to catch up, Microsoft would have to dedicate real resources to the Internet Explorer project. They knew that and they decided to commit, so Microsoft set up a large team of developers and engineers to work long hours hoping to bridge the technical gap between Netscape and Internet Explorer. Their efforts paid off to a point. By version 2.0 of Internet Explorer, sometimes called IE, the browser had many of the same features as Netscape 2.0 and similar performance, but Microsoft still had one big trick up its sleeve.
Eric Sink: It wasn't until IE3 that you started to see it show up bundled already in Windows 95 when you got your computer.
Katy Milkman: This is a pivotal moment in the story. Internet Explorer began to ship as part of Windows 95. No more buying an add-on disc and installing the browser after the fact. It was there on the computer ready to go. At first, this didn't matter much.
Eric Sink: The market share was still about 90% Netscape, 10% Microsoft.
Katy Milkman: But Microsoft was playing the long game. By including their browser with their operating system, they knew they dealt a major blow to Netscape. Internet Explorer was now just sitting there on people's desktops after they installed Windows, already to go. To get Netscape, users had to go and download it or buy the CD and install the software separately. It was only a matter of time until the balance of power in this David and Goliath story would shift.
Eric Sink: At this point, Internet Explorer is becoming part of Windows 95, so the experience for getting the browser has gotten dramatically easier since the expectation is becoming, when you get a computer, it has a browser, it's just there.
Katy Milkman: Keep in mind that Windows was the prevailing operating system of the era. Imagine being Netscape, faced with a giant company with near limitless resources who starts to compete with your business, and they have a built-in distribution network of PC users. You know it's going to be a slog.
Eric Sink: Oh, the rivalry was tremendous. The impact starts to show up in the next couple of years and releases. The damage was starting to become evident. You know, when IE4 was released, the market share had changed to closer to 70% Netscape instead of 90, so they had already gained quite a bit of ground, but IE4 accelerated that pretty dramatically.
Katy Milkman: Microsoft just continued taking more and more market share, and ultimately, the decision to bundle Internet Explorer with the Windows operating system proved to be the death knell for the Netscape browser. Removing the friction of having to download and install a separate browser made Internet Explorer a simple, obvious choice for Windows users.
Eric Sink: It was a smart decision because it was a piece of software that every Windows user would want.
Katy Milkman: That smart decision eventually led Internet Explorer to become the dominant web browser. A federal antitrust lawsuit followed. The lawsuit argued that bundling the browser with the Windows 98 operating system was anti-competitive. However, in the end, Microsoft was able to keep Internet Explorer as a component of Windows.
Eric Sink: And January of 1998 was the time when Netscape more or less threw in the towel and realized that their business seemed to be in serious trouble. They made their browser free, they released it in what we in the industry called "open source," and there were a lot of layoffs in January of '98 at Netscape.
Katy Milkman: Netscape Communications was acquired by AOL in 1999, but before the deal was complete, Netscape released the source code for its browser and created the Mozilla organization, which eventually went on to create the Firefox browser. It was around the same time that they sent this video to employees, which includes a farewell from CEO Jim Barksdale. Here's one more clip.
Speaker 9: He really did help us become one of the greatest companies in history, and it's been a phenomenal ride.
Jim Barksdale: It's the greatest time of my life. I'm going to miss everybody.
Katy Milkman: This massive shift in the browser market hinged in part on Microsoft's decision to bundle their browser with their operating system to take advantage of people's tendency to passively rely on what's available to them by default. It's a phenomenon we still see in tech today.
Eric Sink: Even today, the piece of software that's part of my iPhone, even if there's a better one out there, I'll usually use the one that's just there. Because that extra effort to go get something different, it needs to pay off for me, or I'm not going to bother.
Katy Milkman: Eric Sink is a software developer and writer. He's the author of Eric Sink on the Business of Software, and he founded a software company called Source Gear. He worked as a lead developer in the mid-1990s on Internet Explorer. I have links in the show notes and at schwab.com/podcast.
Microsoft's decision to bundle Internet Explorer with their Windows operating system made Internet Explorer the default, harnessing their customer's natural tendency to use what was readily available rather than devoting time and energy to finding another option. Of course, a default browser doesn't prevent customers from using other browsers, but if you're like most people, you'll probably stick with the default in order to avoid the hassle of configuring something new. Plus, you might figure it's the browser that works best on your operating system, and the one most other people are using, if it's just sitting there on your desktop.
We've talked briefly about defaults before on the show. In Season 1, we talked about nudges, or tools used by policymakers to encourage wiser decisions without forbidding anything or changing people's incentives, and defaults are a widely used nudge, though they're just one of many tools in a nudger's toolbox. They're a common way that policymakers, designers, law enforcement agencies, and others try to turn the best choice into the easiest choice.
Of course, it's hard to say which browser was really the best for internet users, but when a big corporation turns the profitable choice into consumers' easiest choice, that's a time for some healthy skepticism. By the way, Nobel Laureate Richard Thaler, who coined the term nudge, calls this kind of thing sludge. We haven't talked yet, though, about the psychology behind why defaults are so powerful or how they can be used for good. To do that, I've asked Shlomo Benartzi to join me on today's episode. Shlomo is a professor at the UCLA Anderson School of Management.
Katy Milkman: So Shlomo, I just want to start with the most basic thing. So could you define defaults for our listeners?
Shlomo Benartzi: Well, you know, it's funny because there's no way to avoid defaults. There are always defaults. They're always actually what happens if you don't choose, and that is the default. So you could think in a sense of saving for retirement, the domain that, you know, I'm quite passionate about. The default could be that nobody saves, and you actually have to take an action to save, or the default could be that everyone saves automatically, and they take an action to opt out. So in a sense, I think of a default as what happens if I do nothing.
Katy Milkman: Perfect. That's super helpful so we're all on the same page. Can you tell us about some of the early academic research that showed defaults mattered?
Shlomo Benartzi: So there is a very influential paper in the retirement domain, the work that Brigitte Mandrian did with Dennis Shea, and they looked in a sense at the power of default, which is kind of an implicit suggestion. They looked at a company where employees were struggling to save for retirement. So about half the employees would bother to go to the HR office—this was before, kind of, the digital age—fill the paperwork and join the retirement plan. And half of the employees would do nothing, mostly because they were just, you know, busy with the kids, didn't think they have the money to save, a variety of reasons, but there was some obstacles to getting it done.
The company changed the default so that everyone automatically saves for retirement, but they can opt out. It turns out that only 10% of the people opted out. So you boosted participation from 50 to 90%. Now, you're going to have all sorts of concerns. Have we tricked people into saving? Those extra 40% of the people who are now saving, are they piling credit card debt, are they defaulting on their mortgages because they really don't have the money? And there's some surveys done asking actually people who have been both automatically enrolled and people who actually opted out about the satisfaction with the plan, and generally, they're actually quite happy. So it doesn't look like we're tricking people.
So I think you run the risk of tricking people not to save in an opt-in environment if, for example, you make the process too difficult to join the plan.
And I think the real question is, first of all, have we set the default in a way that is consistent with what people, if they bothered to think and be informed, would choose? I think from that direction, setting the default that people save is the right thing. You're making it easy for the largest segment of the population. But I think you should make opting out very easy too, and if you don't do that, then you could have situations where you tricked people into saving or into any other behavior. So I think the critical thing is to make it easy to opt out, but also to provide the right information as they opt out. I think employees who opt out and give up an employer match should be informed at that point that that's what they're giving up. But again, it should be easy. We don't want to trick people into saving. We want to make it easy for people who want to save to do so.
Katy Milkman: And just to add this, for any listeners who don't know what an employer match is, that's when your employer actually puts money into your retirement account on top of your salary that you've contributed, to match. And it's a common incentive—so if you put in 5% of your savings, say, your employer matches that 5%, and you essentially get extra in retirement savings. OK. Here's a really important question we haven't talked about yet, which is, why do you think defaults are so important? What's the mechanism that makes them so sticky?
Shlomo Benartzi: I think people are cognitively lazy. The easiest choice is not to make a choice. So that's one of the reasons defaults are powerful, but I think they might becoming more powerful because there's so much choice out there. It's so difficult to choose. We're all bombarded with offers on our phones, with messages, with emails, with retargeting campaigns by Facebook and Google and others, and I think we have no mental bandwidth left to think about all these choices, and therefore how you set the default would be, I think nowadays, more powerful than it was 20 or 40 years ago.
Katy Milkman: I also think a lot about the implicit recommendations and how that plays in. Do you think that's an important part of what makes defaults work?
Shlomo Benartzi: Yes. I think that especially when people don't have a strong opinion on what they should or should not do, the way the default is set is a signal. I've done a study, maybe 20 years ago, where 401(k) plans were still more invested in what we call company stock than they are now. And what I found out, when the employer put the employer money, the match, into the company stock, employees put more of their own money into company stock. Now, they should do the opposite. If there's already some money not diversified in the company stock, the employees should put their money elsewhere. But since it's such a challenging question, where to invest my money, what they ended up doing, they saw the employer money going into company stock, they piled more of their own money, and then if you hit something like Enron, they lose it all. So I think there is an implicit advice looking at defaults.
Katy Milkman: Right, so there are obviously different kinds of defaults—auto-enrollment into a plan is one, and then what investments the money actually goes into. But let's focus on auto-enrollment. Will you tell me a little bit about your work with Richard Thaler on the Save More Tomorrow program and how defaults relate to the success of that particular program you developed?
Shlomo Benartzi: So it goes back a long time. Somewhere around '96, we wanted to help people save for retirement, and we probably had the more ambitious plan to help people with self-control issues more broadly. We want to diet, but we eat too much. We want to exercise, but we sit on the couch watching Netflix. We want to save, but we spend. But we actually thought that retirement is a lot easier to solve because it could be automated. You could have some defaults that you cannot actually have when it comes to dining, because even if McDonald's stops offering French fries, you could go get it at Burger King next door.
So we picked that domain, and we asked people first if they want to save more. We actually had a sample of blue-collar employees in the Midwest who were not making a lot of money, who were really struggling to pay the bills. And we had no desire to push people or to trick people to save more if they don't want to. And of course they all said actually that they want to save. So the first piece of advice was "Save more." And they all said, "You're a bunch of bozos. You don't understand we can't even pay the bills." So there was a fair point that you hear a lot.
So we came up with the idea that you'll save more, but not today. And there were some ingredients that go back to the behavioral science. It's easier to think about doing the right things in the future. We think about starting our exercise routine in the future. Maybe around the summer, maybe at the fresh-start point, as you would call it, around New Year's. So we use that trick that you will save in the future. Then of course there's the question, when? When would be a good time? And we figured maybe we would do it when people get the pay raise. They never have to cut their spending. They never actually have to feel the loss of not going to dine out.
Of course, now that you have this program that people will save more in the future, maybe every time they get the pay raise, nobody would follow up. This would be like the gym plan. It will never really happen. We'll sign up, and we'll never go to the gym after the first week. So the big differences was that we could create an autopilot, so we could make it the default. Once you sign up, every time you get the pay raise, you're going to save more. Fast-forward, we found a company to do it in '98. Three years later we had the data. People almost quadrupled their saving rates.
Fast-forward, we think now our best estimate at about 15, 16 million people in the U.S. on a program like this. But it's really taking a couple of behavioral principles, creating a program that doesn't fight human behavior, just works with it. And default was a huge part of it, the fact that it's on an autopilot. You can opt out, but every time you get a pay raise, if you do nothing, you're going to save more.
Katy Milkman: That's great. Is there anything you do differently in your life thanks to the research that you're familiar with and have done, related to defaults?
Shlomo Benartzi: I can tell you about all the bad things I do with money. Misbehaving, as Thaler would call it. I make a lot of the mistakes that I study of other people. If you think about Save More Tomorrow, a big part of it is having to do with immediate gratification or with present bias, and we ask people to save in the future because we know that now it's difficult. So one of the tricks I used to do at the cafe, in the spirit of behavioral economics, was to buy a croissant, but the barista in the coffee shop knows that he should cut it in half. He eats half, and I eat half. But in a sense I avoided the immediate gratification and the temptation, because I only got half of the croissant. There was no other half for me to resist. If it were on my plate, I would surely eat the whole croissant.
Katy Milkman: So the barista knew.
Shlomo Benartzi: The default is half a croissant.
Katy Milkman: Yeah. You got a half croissant, and you made a friend in the process it sounds like, so ... Actually that's very clever. If someone is worried about being tricked by—I'll call them bad defaults—what advice would you have for them about how to avoid that kind of a fate?
Shlomo Benartzi: I think it's tricky because first you have to realize that there is a default. So if it's your cell phone company or security company adding all sorts of features to your home security monthly bill, it takes a lot of effort. So I think my first advice would probably be "Pick your battles," because I think we can't avoid defaults, and we won't be able to win every little default. Life is too short. And I would say you might want to consider the biggest decisions where defaults could happen and then study.
I'll give you one example, employer-sponsored health care programs. Generally every year you have to re-enroll, and if you do nothing you get the same plan you had last year. And since those plans actually change, if you do nothing, you might get a similar plan that the employer offers this year. Yet your health might be dramatically different, or the health of your spouse or the kids. The programs might be dramatically different this year. Those would be the places that I would probably engage. Try to get informed and maybe undo the default, but you have to pick your battles. So maybe these three domains that you decide are important, and that's where you actually think about the default.
Katy Milkman: This was so great. Thank you very much for taking the time, Shlomo.
Shlomo Benartzi: Thank you.
Katy Milkman: Shlomo Benartzi is a behavioral economist and professor of accounting at the UCLA Anderson School of Management and a distinguished senior fellow at the University of Pennsylvania's Behavior Change for Good initiative. He's a senior academic advisor to the Voya Behavioral Finance Institute as well.
Katy Milkman: He's also the author of the book Save More Tomorrow: Practical Behavioral Science Solutions to Improve 401(k) Plans. I've put links to his work in the show notes and at schwab.com/podcast.
The trend toward defaulting employees into retirement plans has obvious upsides, but it's not without risk. Being defaulted into saving is better than nothing, but people aren't the same, and one size doesn't always fit all. There's also debate over whether increases in savings can be offset by any increases in debt. Check out the "What Should You Do With Your 401(k)?" episode of our sister podcast, Financial Decoder, to learn more about account defaults—how they might help or hinder your retirement plan. You can find it at schwab.com/financialdecoder or wherever you listen to podcasts.
Like many behavioral biases, our bias to stick with the default is hard to avoid. It's natural to assume a default is being recommended and is therefore the best option. After all, why else would it be the default? And humans and other animals often do their best to avoid extra mental effort, which contributes to making defaults so sticky. This is a useful trait at times when it allows you to avoid wasted effort, but in situations where you may be concerned about being manipulated, there are strategies to counter this tendency.
Looking out for defaults and red flagging them is a start. If you're counting calories, stay clear of meal bundles that automatically include sweet drinks and desserts. If you sign up for a free trial subscription— say, for a newspaper or a TV service—set a calendar reminder to review the subscription before the end of the trial so you don't accidentally commit when, by default, it turns into a real subscription that's automatically billed to you. And look at the opportunity cost of sticking with, say, your current internet or credit card provider just because it's what you're familiar with, versus switching to a lower cost option.
Defaults aren't all bad news, of course. There are ways you can use the stickiness of defaults to improve your life too. Signing up for a savings plan that will make automatic deductions from your paycheck or setting up automatic contributions to a savings account with your bank are ways you can default yourself into saving monthly forever after, and that can make a big difference in the long run, as Shlomo pointed out. Committing to a subscription for a weekly vegetable box delivery can make a healthier pantry the default, and setting a default bedtime notification can go a long way to improving your sleep habits. Defaults can influence our choices in big ways, as nudges or sludge. Hopefully now you're better equipped to recognize them and to use them to your advantage rather than being duped.
You've been listening to Choiceology, an original podcast from Charles Schwab. If you've enjoyed the show, I'd be really grateful if you'd leave us a review on Apple Podcasts. It helps other people find the show. You can also subscribe to the show for free in your favorite podcasting apps—that way you won't miss an episode. Next time we'll look at an interesting way people behave when they get closer and closer to achieving a goal. I'm Dr. Katy Milkman. Talk to you next time.
Speaker 10: For important disclosures, see the show notes or visit schwab.com/podcast.
