Knowing When to Quit: Default Choices, Demographics and Fraud

Abstract

A long literature in psychology and economics has shown that default options influence consumer choices, but it is often unclear whether individual consumers are nudged to choose optimally or simply nudged to a different choice. We study the effects of default options in a novel setting where the optimal choice is clear: the decision to escape from fraud. We employ data from one of the largest telemarketing fraud cases ever brought by the Federal Trade Commission (FTC). The telemarketer enrolled consumers into costly membership programs, which the vast majority of consumers never used. A court order issued during the FTC lawsuit created a natural experiment whereby some consumers were sent "opt-in" letters informing them they had to take action to remain enrolled while similarly situated consumers received "opt-out'' letters that merely reminded them how to quit. We find that the "opt-in" letters increased cancellations by 63.4 percentage points, to essentially 100%. We then examine heterogeneity in the responses to the "opt-out" letters. We find that consumers residing in poorer, less educated Census blocks and those more likely to be minorities were more likely to cancel their subscriptions prior to the FTC lawsuit, but were relatively less likely to respond to an opt-out letter.

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