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.

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