They tend to be biased towards doing nothing; towards keeping the status quo. There is an instinct to avoid taking action for fear it will lead to change and disruption.
This instinct to “do nothing” might not be the best strategy for managing money and making investment decisions. It can, though, be turned to our advantage.
Win some, lose none
The status quo effect can be so strong, this blogpost notes, that people who inherit an investment may not change it even when they admit they never would have chosen it for themselves.
Status quo bias is closely linked to other behavioural traits – loss aversion and regret aversion.
One reason people keep to the status quo is that they fear losing by taking an action. An investment decision will by definition lead to either a gain or a loss, and economists have found that people feel the pain of a loss much more than a gain. Loss aversion can happen when investors try to minimise these painful feelings.
Likewise, investors might delay a decision for fear of suffering a loss in the future – or repeating one made in the past – in which is known as regret aversion. Status quo bias is an extreme form.
Do no harm?
Doing nothing can be harmful in circumstances where making a small change could bring benefit at little risk. An example would be changing electricity supplier to a cheaper alternative. In some cases inaction can lead to extreme declines in wealth and wellbeing, such as the failure to get around to making a will or taking out life insurance.
Good news – doing nothing can pay off
Thankfully techniques have been found to use the inertia that results from status quo to people’s advantage.
Richard Thaler, the co-author of the popular Nudge book, has shown that setting up pension documentation based on the assumption that new employees will join a company or government plan, rather than asking people to join ( so they must “opt out” rather than “opt in”) increases participation in retirement schemes. The UK Government is introducing this automatic enrolment approach from October 2012 partly to encourage people with no pension history to start saving.
Moreover, a “Save More Tomorrow” idea by UCLA professor Shlomo Benartzi takes this further. It proposes workers commit to increasing pension fund contributions in the future, such as by foregoing all or part of future wage increases.
Simple steps can help combat the negative aspects of status quo bias. Having a financial adviser may help. Regular follow-up including timelines, meeting notes, and to-do lists can prompt those prone to inertia to prepare for the meeting.
At an individual level people who are made aware of the role status quo bias plays in their own lives can take steps to reduce the influence of this bias on their decision making.