What is Status Quo Bias?

Status quo bias is an emotional bias in which individuals prefer maintaining their current state or decision, even when better alternatives exist.

It is a reflection of people’s resistance to change and desire for familiarity. This bias can influence decision-making in various aspects of life, ranging from personal investments to organizational decisions.

Status quo bias should not be confused with a rational preference for the status quo, such as when the current state of affairs is clearly objectively better than the available alternatives, or when imperfect information is a significant problem.

A large body of evidence, however, shows that status quo bias frequently affects human decision-making. Status quo bias should also be distinguished from psychological inertia, which refers to a lack of intervention in the current course of affairs.

Psychological Drivers and Resistance

One explanation for status quo bias stems from the concept of bounded rationality, which suggests that humans have limited cognitive resources and time to process information. As a result, they often rely on simplistic strategies and heuristics, leading them to prefer the current state over making changes.

Moreover, several cognitive biases contribute to the presence of status quo bias, such as:

• Loss aversion: People tend to weigh losses more heavily than gains, so they are more likely to avoid making decisions that could potentially lead to losses.
• Regret aversion: Some individuals avoid making decisions that could lead to feelings of regret, consequently preferring the status quo.
• Decision paralysis: When faced with numerous alternatives or complex situations, some people may experience decision paralysis, which prompts them to stick with the current state.

Loss Aversion and Regret Avoidance

One of the primary drivers of status quo bias is loss aversion. It is a cognitive bias in which individuals prefer to avoid losses rather than acquire equivalent gains; this tendency was first described by Samuelson and Zeckhauser in their seminal 1988 paper. In the context of decision making, loss aversion often leads to regret avoidance. Regret avoidance occurs when people take actions to prevent situations where they might feel regretful about the outcome.

According to Samuelson and Zeckhauser, status quo bias is congruent with loss aversion and can be explained psychologically by previously made commitments, sunk cost thinking, cognitive dissonance, a need to feel in control, and regret avoidance. The latter is based on Kahneman and Tversky’s observation that people feel more remorse for bad outcomes that emerge from new activities done than for unfavorable consequences that occur from inaction.

For instance, consider an individual who must choose between investing in a new business opportunity or maintaining their current investment. Loss aversion can create a resistance to change, as the fear of potential losses outweighs the prospect of potential gains. This leads to regret avoidance, where the individual sticks with the status quo to minimize the chance of experiencing regret in the future.

In essence, people are biased towards maintaining their current state due to the psychological inertia driven by loss aversion and regret avoidance.

Familiarity and Exposure

Another psychological factor contributing to the persistence of the status quo bias is the role of familiarity and exposure. Familiarity can be better understood in the context of the mere exposure effect, a psychological phenomenon in which individuals develop preferences for things simply because they have been exposed to them repeatedly.

It is essential to mention that familiarity and exposure can fuel resistance to change. People may feel more comfortable with the status quo due to their familiarity and repeated exposure to it. This comfort level can reinforce psychological inertia and lead to a biased preference for the current state of affairs.

Prospect Theory Context

The concept of status quo bias can also be understood through the lens of prospect theory, a groundbreaking theory in decision-making psychology developed by economists Daniel Kahneman and Amos Tversky. In contrast to the traditional assumption of perfect rationality, prospect theory explains how people make choices under risk.

In prospect theory, what really matters for decision-making is the perception and assessment of changes relative to a reference point, typically the status quo. This perception involves two main elements:

1. Value function: Changes are evaluated in terms of gains and losses, and the function is asymmetric, suggesting that losses have a greater impact on an individual’s utility than equivalent gains.
2. Probability weighting: People tend to overestimate low probability events and underestimate high probability events.

The status quo bias can be partially attributed to the value function’s asymmetry – the strong aversion to losses makes people less willing to switch from their current state. Additionally, the probability weighting component of the theory can contribute to maintaining the status quo by causing people to misjudge the likelihood of potential consequences from alternative choices.

Impact of Status Quo Bias on Decision Making

Status quo bias significantly impacts decision-making processes by causing individuals to favor the current state of affairs over potential changes. This bias often leads to risk aversion and a preference for maintaining existing conditions, even when alternative options might offer superior outcomes. Consequently, decision-makers may overlook or undervalue novel opportunities that would benefit them in the long run.

For instance, consider a company evaluating the choice between upgrading its software and maintaining its current system. The status quo bias can affect the decision-making process by making the company more inclined to keep the existing software in place, even if an upgrade might provide increased efficiency and tangible benefits.

Investment and Economics

In the context of investment and behavioral economics, status quo bias can impact how individuals and organizations allocate their resources. Investors may be more inclined to stick with familiar investments, even in the face of new and potentially lucrative opportunities.

A common manifestation of this bias in the investment world is the home country bias, where investors disproportionately allocate their funds to domestic assets rather than diversifying their portfolios with foreign investments. This tendency often leads to suboptimal outcomes, as a more diverse investment portfolio can help mitigate risk and achieve better long-term returns.

Additionally, status quo bias can affect decision-making in areas such as:

• Retirement planning: People might not adjust their retirement savings plan over time, potentially leading to insufficient funds for their future needs.
• Organizational changes: Companies may resist making necessary adjustments to their internal processes due to an attachment to the current state of affairs.
• Public policy: Governments might maintain outdated or inefficient policies, despite evidence of more effective alternatives.

To navigate the impact of status quo bias, it is essential for decision-makers to be aware of this cognitive tendency and strive for an objective evaluation of all available options. By doing so, they can make more informed choices and seize valuable opportunities that might have otherwise been overlooked.

Examples and Experiments

One example of status quo bias can be found in the domain of retirement plans. It has been observed that employees are more likely to stick with the default options in their retirement plans offered by their employers, even if better options are available.

In a study that investigated the susceptibility to status quo bias among entrepreneurs and bankers, the researchers found that both groups show similar levels of bias, despite entrepreneurs having more experience in business contexts.

Health insurance is another area where status quo bias can impact people’s decisions. For instance, individuals tend to remain with their current insurance provider, even if they could potentially get better coverage or lower premiums elsewhere. This is likely due to a combination of the endowment effect, mere exposure, and the perceived hassle of making changes.

llustrative Case Studies

A number of experiments have been conducted to investigate status quo bias in various contexts. In a study by the University of Oslo, researchers set out to reduce status quo bias in choice experiments. By manipulating the presentation of hypothetical goods and the options’ attributes, the researchers were able to reduce status quo bias in their sample study.

In another experiment, limited attention was found to be a contributing factor to status quo bias. The study used laboratory experiments to test the impact of limited attention with status quo bias and found that people tend to make decisions based on the status quo when they have limited cognitive resources to process their decision-making.

One research paper on ambiguity seeking and status quo bias explored how the preference for ambiguity may result from status quo bias. Their experiments demonstrated that when people are confronted with ambiguous options, they are more likely to choose the status quo, potentially due to a perceived sense of safety or familiarity.

Overcoming Status Quo Bias

In order to reduce status quo bias, individuals and organizations must cultivate rational decision-making processes. The reversal test, introduced by Thaler and Knetsch, can help in evaluating whether the status quo should be maintained or not. This test involves considering a scenario opposite to the current situation and assessing the soundness of the argument for change.

The reversal test is based on the following logic: if a continuous parameter has a large number of possible values, only a small subset of which can be local optima, then it appears implausible that the actual value of that parameter is at one of these rare local optima.

Some other methods to promote rational decision-making include:

• Understanding familiarity and sunk costs: Recognize the role that familiarity plays in decision-making and be aware that sunk costs shouldn’t influence future choices.
• Challenging assumptions and biases: Encourage open discussions and debates to challenge preconceived notions and identify potential biases.
• Gathering evidence: Collect relevant data and information to support decisions, and avoid making choices based on individual preferences or emotions.
• Encouraging action bias: Foster a culture of proactivity so that employees feel confident taking calculated risks and pursuing change when it is beneficial for the organization.

In conclusion, overcoming the status quo bias requires a combination of effective change management, strong leadership, and sound reasoning. By incorporating these strategies, organizations can make informed decisions that lead to long-term success.

References:

1. Bonnichsen, O. L. E., & Ladenburg, J. (2015). Reducing status quo bias in choice experiments. Nordic Journal of Health Economics, 3(1), 47-67.
2. Burmeister, Katrin & Schade, Christian. (2007). Are Entrepreneurs’ Decisions More Biased? An Experimental Investigation of the Susceptibility to Status Quo Bias. Journal of Business Venturing. 22. 340-362. 10.1016/j.jbusvent.2006.04.002.
3. Dean, M., Kıbrıs, Ö., & Masatlioglu, Y. (2017). Limited attention and status quo bias. Journal of Economic Theory, 169, 93-127
4. Kahneman, D.; Knetsch, J. L.; Thaler, R. H. (1991). Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives. 5 (1): 193–206. doi:10.1257/jep.5.1.193
5. Roca, M., Hogarth, R.M. & Maule, A.J.  (2006) Ambiguity seeking as a result of the status quo bias. J Risk Uncertainty 32, 175–194
6. Samuelson, W.; Zeckhauser, R. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty. 1: 7–59. doi:10.1007/bf00055564
7. Suri, G., Sheppes, G., Schwartz, C., & Gross, J. J. (2013). Patient Inertia and the Status Quo Bias: When an Inferior Option Is Preferred. Psychological Science, 24(9), 1763-1769