Status quo bias

Status quo bias is an emotional 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. Status quo bias is an emotional 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. Status quo bias should also be distinguished from psychological inertia, which refers to a lack of intervention in the current course of affairs. For example, consider a pristine lake where an industrial firm is planning to dump toxic chemicals. Status quo bias would involve avoiding change, and therefore intervening to prevent the firm from dumping toxic chemicals in the lake. Conversely, inertia would involve not intervening in the course of events that will change the lake. Status quo bias interacts with other non-rational cognitive processes such as loss aversion, existence bias, endowment effect, longevity, mere exposure, and regret avoidance. Experimental evidence for the detection of status quo bias is seen through the use of the reversal test. A vast amount of experimental and field examples exist. Behaviour in regard to retirement plans, health, and ethical choices show evidence of the status quo bias. Kahneman, Thaler, and Knetsch created experiments that could produce this effect reliably. Samuelson and Zeckhauser (1988) demonstrated status quo bias using a questionnaire in which subjects faced a series of decision problems, which were alternately framed to be with and without a pre-existing status quo position. Subjects tended to remain with the status quo when such a position was offered to them. Hypothetical choice tasks: Subjects were given a hypotheticalchoice task in the following 'neutral' version, in which no status quo was defined: 'You are a serious reader of the financial pages but until recently you have had few funds to invest. That is when you inherited a large sum of money from your great-uncle. You areconsidering different portfolios. Your choices are to invest in: amoderate-risk company, a high-risk company, treasury bills, municipalbonds.' Other subjects were presented with the same problembut with one of the options designated as the status quo. In this case, the opening passage continued: 'A significant portion of this portfolio is invested in a moderate risk company . . . (The tax and broker commission consequences of any changes are insignificant.)'The result was that an alternative became much more popular when it was designated as the status quo. Electric power consumers:California electric power consumers were asked about their preferences regarding trade-offs between servicereliability and rates. The respondents fell into two groups, one with much more reliable service than the other. Each group was askedto state a preference among six combinations of reliability and rates, with one of the combinations designated as the status quo. A strong bias to the status quo was observed. Of those in the high-reliability group, 60.2 percent chose the status quo, whereas a mere 5.7 percent chose the low-reliability option that the other group had been experiencing, despite its lower rates. Similarly, of those in the low reliability group, 58.3 chose their low-reliability status quo, and only 5.8 chose the high-reliability option. Automotive insurance consumers and other examples: The US states of New Jersey and Pennsylvania inadvertently ran a real-life experiment providing evidence of status quo bias in the early 1990s. As part of tort law reform programs, citizens were offered two options for their automotive insurance: an expensive option giving them full right to sue and a less expensive option with restricted rights to sue. In New Jersey the cheaper option was the default and most citizens selected it. Only a minority chose the cheaper option in Pennsylvania, where the more expensive option was the default. Similar effects have been shown for contributions to retirement plans, choice of internet privacy policies and the decision to become an organ donor. Status quo bias has been attributed to a combination of loss aversion and the endowment effect, two ideas relevant to prospect theory. An individual weighs the potential losses of switching from the status quo more heavily than the potential gains; this is due to the prospect theory value function being steeper in the loss domain. As a result, the individual will prefer not to switch at all. In other words, we tend to oppose change unless the benefits outweigh the risks. However, the status quo bias is maintained even in the absence of gain/loss framing: for example, when subjects were asked to choose the colour of their new car, they tended towards one colour arbitrarily framed as the status quo. Loss aversion, therefore, cannot wholly explain the status quo bias, with other potential causes including regret avoidance, transaction costs and psychological commitment.