Behavioral Finance and Your Portfolio

19Emotional Bias #4: Status Quo Bias

Whosoever desires constant success must change his conduct with the times.

—Niccolo Machiavelli (1532)

Bias Description

Bias Name: Status quo bias

Bias Type: Emotional

General Description

Status quo bias, a term coined by William Samuelson and Richard Zeckhauser in 1988,¹ is an emotional bias that predisposes people facing an array of choice options to elect whatever option ratifies or extends the existing condition (i.e., the “status quo”) in lieu of alternative options that might bring about change. In other words, status quo bias operates in people who prefer things to stay relatively the same. The scientific principle of inertia bears a lot of intuitive similarity to status quo bias; it states that a body at rest shall remain at rest unless acted on by an outside force. A simple real-world example illustrates. In the early 1990s, the states of New Jersey and Pennsylvania reformed their insurance laws and offered new programs. Residents had the opportunity to select one of two automotive insurance packages: (1) a slightly more expensive option that granted policyholders extensive rights to sue one another following an accident, and (2) a less expensive option with more restricted litigation rights. Each insurance plan had a roughly equivalent expected monetary value. In New Jersey, however, the more expensive plan was instituted as the default, and 70 percent of citizens “selected” it. In Pennsylvania, the opposite was true—residents ...