Status-Quo Bias – Known devil is better than unknown angel


Status-Quo Bias

Status quo bias is a cognitive bias; a preference for the current state of affairs. The current baseline (or status quo) is taken as a reference point, and any change from that baseline is perceived as a loss. Status quo bias should be distinguished from a rational preference for the status quo ante, as when the current state of affairs is objectively superior to 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.

http://en.wikipedia.org/wiki/Status_quo_bias

“When faced with a complex decision people tend to accept the status quo, hence the old saying ‘When in doubt, do nothing,'” said first author Stephen Fleming

People often prefer not to make changes, even when the benefits of the change could be more.
When faced with a choice to make a proactive decision people opt to do nothing, even if they can easily perform the change and the benefits of the change far exceed the costs of change.
This is because there is a fear that the change may leave to disruption.
Though this bias could help few times, to be in an existing comfort zone without taking risks, most of the time this will stop us from improving and growing.
An investment decision will definitely lead either to gains or losses, but, people feel the pain of loss much more than the pleasure from the gain.

Status-Quo Bias in our day to day lives

  1. Keeping their deposits in their regular bank, even if they find better alternatives in other banks
  2. Having higher risk taking capacity and alternatives, investing only in Gold, FDs, and Govt Bonds etc.,
  3. Companies may not want to change their packaging, model, cover, advertisements etc.,
  4. Taking the same driving route, Grocery from same old store, Coffee from same coffee shop etc.,
  5. Employees may not want to take and try a different role or domain etc.,
  6. Using the same brand and product regularly for years – for ex., soaps, toothpaste, washing powder etc.,
  7. Keeping same services – for ex., cable network, internet and phone services, utility services etc.,
  8. People may even reject an opportunity of a promotion when it comes with relocation

Overcoming Status-Quo Bias

  1. Professor Luce points out that there are actually three status quo alternatives in most choice situations: 1) “make do” with what you have, 2) continue to search, and 3) select the dominant alternative. The key for us is in that third choice.
  2. Voluntarily try something new. Start with simple things like changing the driving route to office, trying coffee from another outlet etc., If it doesn’t work, you can always go back
  3. Procrastination could help. When asked to make an immediate decision, 80% of the time people make the default choice – that is, no change. Given some time to think and decide, approximately 50% of the people chose no change.
  4. Objectively analyse each situation, keeping emotions apart. Collect pros and cons and data points and analyse and then make a decision

My Experience with Status-Quo Bias

I took a home loan from a bank initially, and when interest rates moved up, I was still sticking with the same institution because I was for some reason not comfortable moving my home loan to other banks even though they offered loans at lesser interest rates. By this time, the interest rate difference between my home loan and the few other banks were more than 2%. Then, I decided to work out the cost of switching and savings on EMIs etc., and switched the loan.

Advertisements

Leave a comment

Filed under Behavioural Finance

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s