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Basic Biases: Status Quo Bias

26/8/2014

1 Comment

 
The status quo bias is in short the tendency to continue with the current state of affairs, despite being given an option to pick something better. Let’s illustrate it with an example:

At least here in Finland, one has the opportunity of comparing different electricity service providers. The quality of the product is the same, but the price is different. Now, if a consumer- let’s call him John – chooses to remain with his current provider despite knowing that there are equally good and cheaper options, he is epitomizing the status quo bias: overly preferring the current state.
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The example above is in reality often more due to just not wanting to expend effort into comparing providers and so on. However, what’s especially worrying about the status quo bias is that it gets even worse: it affects our judgments of what is good in the first place. The existence of better alternatives is what marks the difference between a rational status quo choice and an irrational bias.

Consider the case of comparing electricity providers in the US. A study was done with two groups of people: one group with reliable, more expensive service, and the other with cheaper, less reliable service. Both groups were given six options of electricity plans to choose from: their current status quo and five alternatives. Each alternative had a service level and price defined relative to their current plan, to make the options realistic. Even though both groups were earning comparable amounts, there was a huge difference in their choices. In fact, almost 60 % of respondents – in both cases – chose their own current status quo!

It appears that their choices were driven only by their current plan, and as the groups had very different plans, they ended up with very different preferences. Why is this case an example of a bias? Well, if we consider that reliability-preferring and price-preferring customers are demographically equal (as they were in the experiment) it is nonsensical that there would be two optimal price-service combinations, and that the current plans would be just those. In contrast, it seems the customers‘ preferences were caused by the status quo.

What makes status quo bias difficult to notice is that sometimes, in fact, the current state might be good enough. As we have limited energy for thinking, it’s best to focus on improving things going badly. But – as the bias shows us – what we think is “good enough” could in many cases be improved with little effort. Sure, in the case of electricity the stakes might not be very high, but there are cases with much more import.

Consider long-term saving, for example. You probably have some portfolio of investments like shares, managed investment funds, index funds and so on. How good is your portfolio, compared to others? The general answer – “probably good enough” – is understandable. However, it just highlights the status quo bias, sticking to the current state even despite having options. And in this case, the gains can be immense. Having 1 percentage points better return over a 10 000 euro initial investment makes for an almost 7000 euros difference in 25 years!

At this point, unfortunately I don’t know any good magic tricks to avoid status quo bias. But in my opinion noticing the problem is the first step to success. So in that spirit, the noticing phase might look like this:

  1. Am I preferring the current state?
  2. What other alternatives are there?
  3. Is the current state really better than all the other options?

The trick here is to generate alternatives first, because by comparing with those it’s easier to notice the bias. If you go from step 1 to straight to asking whether the status quo is good enough, it’s just too easy to answer “yeah, probably so”. If it really is, at worst you’ll lose a few minutes by thinking about the alternatives. If it isn’t, at least you’ll find out!

1 Comment
Backpack Ben link
26/3/2021 12:44:51

Thanks for postinng this

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