When choosing to do nothing is good for you

When choosing to do nothing is good for you

Dave Rae

Sometimes choosing to do nothing can be good for you – it can even save lives. A paper by Eric Johnson and Daniel Goldstein titled Do Defaults Save Lives?, examined organ donation consent rates across European countries. The table below shows there is a significant variation them. Why do you think this would be?

defaults

Source: sciencemag.org VOL302

It all comes down to how the consent form is written. In those countries in the blue, the ‘default’ or ‘do nothing’ option is that you intend to donate your organs. In the gold countries, choosing to donate your organs meant you had to opt in – actually make the choice to donate.

Dan Ariely, Professor of Psychology and Behavioral Economics at Duke University suggests the reason is not necessarily down to laziness or because people don’t care. It is that when faced with a hard emotional decision – people don’t know what to do, so they adopt the default.

An example of how defaults are used in the financial world is life insurance through a super fund. Many funds contain a default level of cover based on age. For example, a 35 year old female may have $150,000 of life and disability cover once an account is opened.

The fund tells you “getting cover is easy” you’re automatically approved when you join. You can choose not to have this cover, but the catch is you have to fill out a form and send it to them to cancel it. Now many people need this cover, especially if it is the only life insurance they have. But I’m willing to bet the take up of the default cover is very high because most fund members simply do nothing.

We know compulsory super acts as a default saving mechanism, albeit without the ability to opt out. Imagine what your retirement savings would look like if you weren’t forced to contribute a percentage of your salary?

How could you use this concept to help you with your day-to-day saving? Do you find yourself spending your pay each month then hoping to save what is left over? What if you decided to set your own personal default position – say 10 per cent of every dollar you earn is invested for the future. Set it up once then do nothing but spend everything that is left over.

Would your financial future look brighter?

 Dave Rae is a director, owner, and Certified Financial Planner at DPR Accountants and Advisers. He is a self-managed superannuation fund specialist adviser and works with clients to explore their goals and help them to build financial roadmaps to reach these. Dave co-founded DPR Accountants and Advisers in 2014 and has over 15 years’ experience in the financial services industry. He features on No More Practice’s The Investment Series 3 – The Philosophy Series where he provides financial advice to his client and helps him to understand his financial decision-making preferences.


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