Unveiling the invisible chains of Status Quo Bias, we delve into the human tendency to prefer the familiar. We explore how this cognitive bias influences decision-making processes, shaping our personal lives, business strategies, and societal norms.

Where this bias occurs

Most of us work & live in environments that aren’t optimized for solid decision-making

  • We are more inclined to leave things as they are than we are to go out of our way to make a change
  • Sam is a college student, gearing up to start a new semester
  • Their school offers medical and dental insurance, into which students are automatically enrolled
  • The cost of the insurance is, by default, included in the total sum of Sam’s school fees
  • If things were reversed, and the default was for health insurance to not be included, there would be far fewer students covered by the school’s healthcare plan due to status quo bias

Loss aversion and regret avoidance

Loss aversion is a concept in behavioral economics that refers to how the psychological pain we experience upon a loss is greater than the pleasure we experience from a gain of the same magnitude

  • This can impair our decision-making capabilities by preventing us from selecting the most advantageous option out of fear of failure
  • When making a decision where we must choose between the default option and its alternatives, we treat the status quo as a reference point, or baseline
  • Regret avoidance is a related concept, which posits that we tend to be more regretful of negative consequences resulting from an action than we are of similar consequences stemming from inaction

Why it is important

Being aware of status quo bias can help us catch ourselves in the midst of using it, from which point we can go on to reevaluate our options and come to a more advantageous conclusion

  • This is of particular importance when the decision we are making carries significant weight

The New Coke Fiasco

After years of soda supremacy, Coca-Cola was rapidly losing market share to Pepsi and diet soft drinks.

  • To save the company, Coke executives needed to step into the future with a new recipe
  • They conducted several blind taste tests, which were an overwhelming success
  • New Coke’s sweeter taste was preferred to the classic concoction
  • Despite all the metrics, industry experts, and executives singing its praises, the release of New Coke was a colossal failure
  • Shortly after the release, the company’s hotline received over 40,000 outraged calls, around 1100 more each day than before the change
  • Public protests, boycotts, and critics that ranged from David Letterman to Fidel Castro all lambasted the change

Systemic Effects

Systemic effects

  • People’s preference for the default option over its alternatives can have significant consequences
  • For example, people must register to become organ donors but the default status is often to not be a donor
  • This means that there are likely fewer people registered as organ donors than there would be if it were the default

Example 2: Missing out on Retirement

Over half of all TIAA-CREF plan participants were holding too many risky stocks in their portfolios right before retirement

  • This was because plan participants stuck with the default asset allocation they were given when they were young
  • Luckily, many mutual funds have caught on to the negative effects of the status quo bias and offer life-cycle funds which automatically shift assets around based on the individual’s savings goal time horizon

Why it happens

Consistent with the concepts of loss aversion and regret avoidance

Decision-making can be overwhelming

When faced with a choice, it is not always obvious what the correct decision is

  • Status quo bias gives us something to fall back on at times when we feel overwhelmed
  • It can be useful when making mundane decisions – it’s far easier to choose the same loaf you always get, rather than inspect every single option
  • The time spent weighing your various options is referred to as deliberation costs

Status quo bias

Our preference to leave things the way they are over changing them

  • Prevents us from actively shifting our assets, exposing us to higher risk than necessary near retirement
  • How to avoid it
  • Recognizing the status quo bias when presented with choices is the first step to beating it – making a plan of action can help us achieve success more effectively

Individual Effects

Engaging in status quo bias is a sign that you’re not taking an effortful approach to decision-making

  • This can lead us to make decisions that aren’t in our best interest
  • Action bias is the tendency to prefer action to inaction, even when the latter is the more advantageous response
  • In many situations, the default option is an active response

How to avoid it

Take the time to weigh all of your options carefully, giving them each equal consideration. Doing so will prevent you from automatically opting for the default option.

  • When we’re motivated to do something, having a specific plan of action increases the chances of us actually getting around to it.

How It All Started

One of the first papers written about this bias was “Status Quo Bias in Decision Making” by W. Samuelson and R. Zeckhauser in 1988

  • In this paper they investigated how “status quo framing” – making one option the default choice – affected decision-making
  • The same investment option became significantly more attractive when it was framed as the status quo

Source