Status quo bias

People tend to keep investments as they are. This is also present in business world. For instance: CEOs are reluctant to sell their business even though this might result in a better position for the firm. Status quo bias can be explained by several theories.

Aversion to loss

Individuals are averse to losses. They are more concerned about the risk of loss that they are excited by the prospect gains. Samuelson and Zeckhauser (1988) conducted an experiments where individuals were asked to assume they inherited some amount of money. Participants were asked if they would keep investments as they are or trade it for one of three available options. They chose to keep investments as they received rather than switch it to investments that best suited their particular needs. People fear switching into securities that might result in losing value.

Endowments effect

Endowment effect states human beings have a strong desire to hang on what they own. The very fact of owning something makes it valuable to the owner. Thaler pursued an experiment with coffee mugs. Students were asked to value a mug between $1 and $9. Participants who owned the mug valued it for $5.25. Individuals who did not own them and were asked to place an objective verdict, valued it for $2.75.

Recommendations

Distinguishing between status quo option, what is genuinely right course of action and what feels safe because of bias is a difficult, but not an impossible task. (1) Decision makers should adapt radical views of portfolio decisions. View divestments as healthy renewal of corporate portfolio. (2) Furthermore, be aware of status quo bias when analysing risk options.

Adapted from

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

Common biases in decision making

In general there are three general heuristics namely availability, representative and confirmation heuristics. They encompass eleven specific biases.

Cognitive bias

Economists claim individuals are rational decision makers. They collect a lot of information, examine all alternatives and make decisions that maximise personal satisfaction. However, we do not make decisions in…

Heuristic definition

Individuals rely on rules of thumb (heuristics) to lessen the information processing demands of making decisions.

Availability heuristic

The inferences we make about event commonness based on the ease with which we can remember instances of that event.

Retrievability bias

We are better at retrieving some subjects from our memory than other things. Individuals base judgement on commonality and easier base strategies.

Base rate fallacy

People tend to ignore background information relevant to the problem such as base rate. We tend to assume that causes and consequences are related.

Gambler’s fallacy

Simple statistics claims each event in a sequence is equally likely to occur. But individuals believe random and non-random events will balance out.

Small sample size fallacy

Simple statistics state that we are more likely to observe an unusual event in a small sample compared to a large one. Learn more.

Conjunction fallacy

Describes how conjunction is judged to be more probable than a single component descriptor. Intuitively thinking, something appears to be more correct.

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