In 1985, Coca-Cola launched the “New Coke,” a slightly new variety of the original Coke flavor. In the blind taste testing, the majority of consumers preferred the New Coke over Coke Classic. However, when the same people were asked to choose which version of Coke they prefer buying, they chose Coke Classic.
Now, why are we talking about it? We are talking about it because it can be particularly tough for a person to decide when presented with multiple options. Making a choice can be a challenging process, and change can be very scary for some people. That is why many people prefer indecision, i.e., sticking to the status quo over making an informed decision.
This indecision is an example of a cognitive bias where people like things to stay as they are currently. Such tendency can make people hesitant to change and can have severe implications on their decision-making skills.
Index:
What is Status Quo Bias?
Humans often avoid change, and when faced with a situation where we have to choose, we tend to go with our pre-set options or default choices. Status quo bias is an inherent tendency in some people to maintain the current status of things and prolong the status quo; it is a preference for the current state of affairs.
Humans can be cognitive misers when it comes to making every decision an informed decision. We often accept defaults and things that we have done before without considering other/ better options. In simple words, Status quo bias is a tendency where an investor chooses to invest in an option, which extends their current arrangement or position even though such an investor has been given various options to choose from.
The logic behind such a bias is that investors vary changes. Therefore, they view change as a cost or a negative implication that they try to avoid. However, this usually lasts till the benefits of a changed choice outweigh the costs involved. This is why people in general and investors prefer to maintain the status quo when presented with multiple options.
What leads to Status Quo bias?
Status quo bias is closely associated with several other biases, tendencies, cognitive misperceptions, and psychological commitments as these work in tandem. Mentioned below are some of the most common reasons for preferring the status quo:
- Choice paralysis: People overwhelmed by options to choose from are likely to stick with what they know as a safe option or do nothing.
- Mere Exposure Effect: This effect states that people often prefer things and choices that they have been exposed to. Thus if they are more exposed to the status quo than anything else, the mere exposure effect can create a preference for the status quo.
- Loss aversion: When a difference between two options is viewed as a difference between two disadvantages, the difference will have a more significant impact. Studies have highlighted that when individuals make decisions, they consider the potential for loss over the potential for gain. Thus, when faced with choices, they stress more on what they could potentially lose by changing the status quo other than focusing on what they can potentially gain by making a change.
- Sunk costs fallacy: The Sunk Cost Fallacy is when an individual will continue to invest resources into a specific venture simply because they have previously invested resources. Such investment continues even if the said venture is failing or not showing any potential for gain. Sunk costs lead to status quo bias as the more an individual invests in the status quo, the more likely they are to continue investing in the same.
- Cognitive Dissonance: When an individual is faced with inconsistent thoughts, they experience cognitive dissonance. This can be an uncomfortable feeling that people wish to avoid. To do that, individuals often avoid thoughts that make them uncomfortable to maintain cognitive consistency. Similarly, in decision-making, individuals tend to see an option availed before as more valuable and consider the options to the status quo as a cause of cognitive dissonance. As a result of this, they stick with the status quo to reduce dissonance.
Examples of status quo bias:
- When a small town had to be relocated, the residents were offered many choices for accommodation in a new town. Still, residents went ahead with the option which resembled their old town and accommodation.
- In blind testing, consumers preferred New Coke, but when given a choice to buy, between the classic and the new, they preferred classic Coca-Cola.
How Status Quo Bias Affects business and investment decisions?
- Status quo bias can cause a business owner to avoid taking risks or introducing changes. They may continue to do so even if the risk might help them achieve their financial goals in the long run.
- This is frequently seen when investors prefer not to change the stocks even if such a change would add diversification and make financial gains possible. The result is that the investors end up holding on to specific investments, which are more likely to lead to a loss.
- In other cases, investors or business owners tend to become emotionally attached to the business/investment. They are not willing to part away with the business or investment even if they get a reasonable price for it.
- Investors or business owners with status quo bias exaggerate the potential losses that they might face upon changing the status quo and justify that the status quo is the best option. They tend to minimize the potential benefits of other options to project the status quo as the best decision.
- Status quo bias may also stop you from recruiting new and more qualified professionals in your team. This is so because you would feel uncomfortable working with new people and as the old recruits are the people you are comfortable with.
How to avoid Status Quo bias?
Since the tendency results from incomplete analysis or lack of going thorough analysis, it will be advisable that a person or an investor take the services of people who can offer them a clear and unbiased analysis before making any decision. Additionally, status quo bias is also associated with distorted facts; therefore, attention must be paid that no distortion of facts occurs before making a decision.
Another factor associated with the bias is the inability to deal with emotions. Hence efforts must be made to take decisions based on facts rather than feelings. Financial advisors must educate their clients in managing their emotions as it can lead to a lower portfolio value and losses in the long run. Moreover, it is important to understand that, exploring other options may not lead to a loss every time.
A final word:
Status quo bias is often rooted in a person’s psyche, which makes it challenging to overcome. But by being aware of how the bias influences your decisions, you reduce the bias affecting your choices.
It is no surprise that people tend to opt for the first or familiar choice: however, this inaction can lead to significant losses in the long run. Therefore it is essential to make a careful and well-informed decision.
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What is Status Quo Bias?
Status quo bias is an inherent tendency in some people to maintain the current status of things and prolong the status quo; it is a preference for the current state of affairs
Whats the example of Status Quo Bias?
In 1985, Coca-Cola launched the “New Coke,” a slightly new variety of the original Coke flavor. In the blind taste testing, the majority of consumers preferred the New Coke over Coke Classic. However, when the same people were asked to choose which version of Coke they prefer buying, they chose Coke Classic.
