Status Quo Bias Explained Perfectly With Apt Examples

Which color car would you buy for yourself? Which color would you paint your house with? Which is your favorite restaurant? What would you prefer for dessert? These are probably some easy-to-handle questions. Let's get to some difficult choices now.

How do you plan to invest the surplus from your enterprise this year? What would you prefer - a treasury bond, a low-risk mutual investment plan, a high-risk but handsome return plan, or a moderate-risk allotment of your portfolio? Naturally, this set of queries requires us to think more over the available options, as compared to the choice we could have made in choosing our favorite colors!

How do you think we come to make a final decision in this second set of questions? It is observed that we generally tend to make such difficult decisions by our preferences, which may not always be objective enough, or rational either. You may even remember making up your mind on an insurance plan, not because you had carefully studied and opted for it, but rather because that was the most-preferred choice, or the status quo. If yes, then let us find out what this status quo bias is all about.

Status Quo Bias is a preference given to the present state of affairs, or a natural bias towards the current or previous decision.

A given standard is accepted to be the reference point. Any deviation from this point is considered to be a loss or an unwanted risk. Thus, there is a tendency to prefer the existing and default options, which is the status quo bias. Loss aversion is understood to be a primary reason behind having a status quo bias. When confronted with a choice, individuals go for an option that is less likely to result into a loss.

William Samuelson and Richard Zeckhauser brought in the concept of 'status quo bias' through their work 'Status Quo Bias in Decision Making', published in the 'Journal of Risk and Uncertainty' in 1988. They presented the concept with the help of a questionnaire. Individuals were given decision-making problems, with and without a pre-existent status quo position (certain choices were labeled as 'status quo'). It was found that people were inclined towards the status quo more.

According to the study, 'the status quo bias is best viewed as a deeply rooted decision-making practice, stemming partly from a mental illusion and partly from psychological inclination'.

Why such biases occur explains that it is not something wrong, in fact, an obvious way of thought. Transaction costs is given as an important reason. For example, if changing my cell phone service provider takes up more dollars or more efforts, I would prefer staying happy with the current provider, even if other providers are better. Another cause behind a prejudice is the tendency to procrastinate and delay decisions, leaving individuals with the status quo by default.

The bias about status quo is believed to have either of the two attributes:

1. It is an option that a person is currently choosing,
or
2. It is the option that a person will end up with, if he or she does not actively make a choice.

There can be, of course, a situation where both these attributes are present.

The degree of the bias that one has depends on many factors, one of them being the number of alternatives that are present. If an individual's preference for a particular alternative is strong, naturally, the bias is weaker. On the contrary, with an increasing number of choices, the relative bias for status quo is stronger.

As a Water Commissioner, one has to choose among various probable water allocations between the farmers and residents, during a water shortage. In this case, a status quo is introduced in some versions of choices, by marking the water distribution option chosen by the former Commissioner in a similar drought situation. Other details like the agricultural demand for water are also given. The results of this decision-making task can tell the significant impact on the actual decision made by the audience, due to the labeling of a certain option as 'status quo'.

While considering various investment portfolios, there were several options, including a moderate-risk company, a high-risk company, treasury bills, and municipal bonds. Few investors or decision makers were presented portfolios with the same choice, but with one option being marked as 'status quo'. It was a moderate-risk company; the tax and broker commission effects arising from any changes were insignificant. It was observed that this option was favored more after it was marked as 'status quo'.

Preferring a particular brand for various daily essentials, like cosmetics, food and drinks, clothing, etc., also exemplifies our leanings. Here, even though there is plenty of choice, people tend to demand a specific product, for years long. This reluctance to change is also strong in case of products that are equally competitive, and also similar in all attributes. The Samuelson and Zeckhauser paper revealed such tastes of people for older version of Coca Cola, as compared to the new Coke.

People tend to use a particular Internet browser that is already installed on their system, rather than willfully installing another one. This can be given as a perfect example of the 'default option'. The same is also seen when an individual is facing a new environment. While buying insurance for the first time, a person is naturally prone to go for the 'default insurance plan', instead of purposefully choosing a plan on his own.