Status Quo Bias in Decision Making

“To do nothing is within the power of all men.” — Samuel Johnson

A fundamental assumption in rational decision making is that only relevant information from the alternatives available will influence an individual’s decision. Thus, the order in which alternatives are presented should not affect an individual’s choice.

However, decision problems are rarely presented without a status quo (doing nothing) option. And decision makers love that status quo alternative.

Below are excerpts from a fascinating paper by William Samuelson and Richard Zeckhauser on a series of decision-making experiments designed to test for status quo effects. Their main finding is that decision makers exhibit a significant status quo bias: “Subjects in our experiments adhered to status quo choices more frequently than would be predicted.”

An illustration:

To illustrate our findings, consider an election contest between two candidates who would be expected to divide the vote evenly if neither were an incumbent (the neutral setting). (This example should be regarded as a metaphor; we do not claim that our experimental results actually explain election outcomes.) Now suppose that one of these candidates is the incumbent office holder, a status generally acknowledged as a significant advantage in an election. An extrapolation of our experimental results indicates that the incumbent office holder (the status quo alternative) would claim an election victory by a margin of 59% to 41%. Conversely, a candidate who would command as few as 39% of the voters in the neutral setting could still earn a narrow election victory as an incumbent. With multiple candidates in a plurality election, the status quo advantage is more dramatic. Consider a race among four candidates, each of whom would win 25% of the vote in the neutral setting. Here, the incumbent earns 38.5% of the vote, and each challenger 20.5%. In turn, an incumbent candidate who would earn as little as 9% of the vote in a neutral election can still earn a 25.4% plurality.

Some examples of status quo effects in practice — the decisions made in these examples display a strong affinity for the status quo:

A small town in Germany. Some years ago, the West German government undertook a strip-mining project that by law required the relocation of a small town underlain by the lignite being mined. At its own expense, the government offered to relocate the town in a similar valley nearby. Government specialists suggested scores of town planning options, but the townspeople selected a plan extraordinarily like the serpentine layout of the old town—a layout that had evolved over centuries without (conscious) rhyme or reason.

Decision making by habit. For 26 years, a colleague of ours chose the same lunch every working day: a ham and cheese sandwich on rye at a local diner. On March 3, 1968 (a Thursday), he ordered a chicken salad sandwich on whole wheat; since then he has eaten chicken salad for lunch every working day.

Brand allegiance. In 1980, the Schlitz Brewing Company launched a series of live beer taste tests on network television (during half times of National Football League games) in an effort to regain its reputation as a premium beer. (It had fallen from second to fourth place in market share.) A panel of 100 confirmed Budweiser drinkers (each had signed an affidavit that he drank at least two six-packs of Bud a week) were served Budweiser and Schlitz in unmarked containers and asked which they preferred. Schlitz’s advertising gamble paid off. On live television, between 45 percent and 55 percent of confirmed Budweiser drinkers said they preferred Schlitz. Similar results were obtained when confirmed Miller drinkers participated in the test.

…Offered a score of plans, citizens duplicated the layout of their town. The lunchtime diner’s relationship with his chosen sandwich has outlasted several marriages. Taste notwithstanding, beer drinkers are loyal to their chosen brands. In each case, status quo bias appears to be operating.

Beer drinkers are not the only consumer segment loyal to its chosen brands.

The greatest marketing error in recent decades—the substitution of “new” for “old” Coca Cola—stemmed from a failure to recognize status quo bias. In blind taste tests, consumers (including loyal Coke drinkers) were found to prefer the sweeter taste of new Coke over old by a large margin. But the company did not think about informed consumer preferences—that is, their reactions when fully aware of the brands they were tasting. Coke drinkers’ loyalty to the status quo (Coke Classic currently outsells new Coke by three to one) far outweighed the taste distinctions recorded in blind taste tests. In short, so far as marketing was concerned, blind taste tests, despite their objectivity (or, more aptly, because of it), proved to be irrelevant.

Explaining the status quo bias:

Explanations for the status quo bias fall into three main categories. The effect may be seen as the consequence of (1) rational decision making in the presence of transition costs and/or uncertainty; (2) cognitive misperceptions; and (3) psychological commitment stemming from misperceived sunk costs, regret avoidance, or a drive for consistency.

…In our view, the best explanation is that the status quo choice acts as a psychological anchor. Roughly speaking, the stronger the individual’s previous commitment to the status quo, the stronger the anchoring effect.

Perhaps my favorite part of the paper was this discussion on soft-sell techniques used in business to exploit the status quo effect:

Many of the most effective techniques lead the consumer to make a psychological invest- ment in the buying process. For instance. Thaler (1980) points out that a common inducement is the trial purchase without obligation; the item may be returned for a full refund. To the consumer, this appears to be a “no lose” proposition. Arguably it is, but for the seller. For the duration of the purchase, consumers abandon the search for better alternatives, while increasing their psychological investment in the purchase. In their self-perception, they made the purchase for a deliberate purpose: not simply as a trial, but because the item satisfied their needs. The epitome of this device is the free baby picture offer. (The proud parents are under no obligation to buy the other portraits. But look how cute they are. Isn’t it a shame that the shots will be wasted?) Similarly, order-takers always try to obtain a deposit from the customer, not because it is necessary to reserve an item, but because it is the surest way to secure a sale. The deposit can be completely refundable or can be for a nominal amount; the key is to induce the consumer to part with it.

A variant of these practices occurs in the pricing of multiple telephone and cable television service options. Providers of these services typically charge customers a one-time transaction fee for switches to an upgraded package (e.g., adding cable channels) but levy no transition fee for downgrading. In this way they hope to persuade the customer that it is wise to begin with the upgraded package for a trial period. Thus, these expensive packages become (and subsequently remain) the status quo alternative for a predictable number of customers.

A final tying tactic is typified by the S&H green stamp and frequent flyer programs. It would appear that travellers are tied to their chosen airlines as much by illusory factors as by real ones. By offering large mileage bonuses upon initial enrolment and by setting many intermediate awards as mileage accumulates, airlines’ coupon plans emphasize pseudo-sunk costs and offer plan members strong psychological inducements to accumulate mileage, even though the ultimate awards are small.

Status quo effects also influence policymaking within organizations, both public and private:

Once made, policies frequently persist and become codified implicitly or explicitly in the form of decision-making rules of thumb, company policy, standard operating procedures, and the like. Public program review is an important case in point. Far less than 1% of the funds allocated to public programs is devoted to program review or performance evaluations. When Gilbert, Light, and Mosteller (1977) reviewed 29 large-scale social programs (including the Salk vaccination program and the New Jersey negative income tax experiment), they found the vast majority of program evaluations to be inconclusive respecting the relative benefits and costs of the programs. Nonetheless, policymakers were inclined to view these programs as successes, and program evaluators (such as they were) buttressed this belief Of course, many programs receive little or no evaluation. Without such evaluation, given the difficulty of terminating spending on items that have become part of an authorized budget, long-standing programs often have a life of their own (though they would have little chance of passing a new pro- gram cost-benefit test).

Abstract:

Most real decisions, unlike those of economics texts, have a status quo alternative—that is, doing nothing or maintaining one’s current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science.