Why We Have Trouble Making a Change

When faced with a tough decision, most people choose to do nothing.

This is the basis of the Status Quo Bias, first proven in a series of experiments in 1988 out of Harvard. The general idea is that people are emotionally attached to the current state of affairs and are skeptical of any change from that baseline.

This means that we tend to need overwhelming proof to make a change, even when that change would be the better option.

Status Quo Bias in Studies

One hypothetical that the 1988 study used was investing. Subjects were put in the situation of someone who had just inherited a large sum of money and had to decide where to invest it. They were told they could invest in a high-risk company, a moderate-risk company, municipal bonds, and treasury bills. (Clearly the experimenters had not read my article on following Warren Buffett’s advice, but I can’t blame them for not having a time machine.)

Some of the subjects were given the options just like that. Others were told that “a significant portion” of the inheritance was already invested in one of the options. People decided that wherever the money already happened to be also happened to be the place that they would put the money.

A much weirder hypothetical from an experiment out of Duke also shows this bias.

First, in 1978, philosopher Robert Nozick posed a thought experiment. What if you could plug into a machine that would stimulate your brain in order to make you think that you were experiencing whatever you wanted to experience? You could plug yourself in for the rest of your life and would be completely unable to tell the difference between the real world and the machine.

Most people would decide not to hook themselves into the machine.

But an experiment out of Duke in 2010 flipped the scenario on its head. What if you were already hooked into the machine and somebody came to tell you that your whole as you remember it has been a product of this machine. Your real life is very different from the life you think you’ve been living. Would you like to unplug?

Basically: red pill or blue pill?

The answers should be the same, right? You are still deciding whether you would prefer to be connected to the machine or living your real life. And yet 59% of the people in the study said that they would prefer to stay hooked into the machine to live their pretend life. The fact that the machine was their status quo hugely influenced their decision.

Status Quo Bias in the Real World

On Tuesday, Penny over at She Picks Up Pennies discussed what she considers to be her biggest money mistakes. Number 1 on her list was failing to weigh her benefits options during open enrollment season. The statistics show that Penny is far from alone in this.

Field data show a very large discrepancy between the heath plans that new employees choose and those that existing employees choose. Traditional economists believed that we always made the best decision possible with the information available to us. If this were true, then the new employees and the older employees would be looking at the same information and making the same decisions.

Instead, older employees had already picked a health plan and tended to stick with it. Even when newer plans were added that may have been a better fit for them or their old plan changed and became less beneficial, they still showed a bias told the old plan. New employees, however, didn’t have a status quo to fall back on, and thus made a more unbiased decision. (Unbiased at the time, of course. Those new employees will be biased old employees soon enough.)

As the election is nearing, how about we take a look at a voting application of the status quo bias?

In 2012, 90% of members of Congress that sought reelection were successful. This is pretty standard. In 2010, 85% of House members running for reelection won, and that was the lowest percentage since 1970.

In polls right before the 2012 election, Congress had an approval rating of 21%. (This being a drastic improvement over their September 2012 approval rating of 13% and their August 2012 approval of 10%.)

So 21% of people approved of Congress. And yet America voted to keep 90% of Congress the same. It appears that voters have a status quo bias, as well.

The Status Quo Bias and Defaults

The fact that most people prefer not to make decisions makes default choices very important.

In Germany, only 12% of the population are organ donors. Right next door in Austria, 99% of the population are organ donors. A better writer would list the ways in which these two countries are similar before telling you why those numbers are so different, but I already gave it away.

The default choice is different.

In Germany you need to opt-in to become an organ donor. In Austria you are automatically an organ donor and you need to opt-out if you prefer the alternative.

Closer to home, we can see default choices affecting money decisions in American 401(k) plans.

One study by the National Bureau of Economic Research looked at changing the defaults on 401(k) plans at three companies. They found that after six months with the companies, 26-43% of employees participated in the 401(k) plan. These numbers worked up to 57-69% after three years with the same company. When employees were automatically enrolled in the 401(k) plan instead, these numbers jumped to a minimum of 85% participation after six months and stayed there. Simply switching from an opt-in model to an opt-out model drastically increases participation.

This same default effect applies to the contribution rate and the choice of investment. The study found that with automatic enrollment, 80% of plan participants accepted the default savings rate and the default investment. This is decidedly more negative than accepting automatic enrollment into the plan. The default contribution is generally 2-3% and the default investment is often a money market fund. Those choices are not going to get you to a comfortable retirement.

Takeaways

So what are the takeaways here?

From a policy perspective, companies and lawmakers should recognize the pervasive effects of Status Quo Bias and set up helpful defaults. We know that organ donations save lives and that retirement contributions need to be higher (and more aggressive) to ensure a comfortable retirement. Changes to these defaults could help people make smarter decisions by changing their baseline.

However, I assume that most of my readers are not CEOs or elected lawmakers.

So for individuals, recognize that we all are subject to this bias. In the Harvard study discussed above, a group of participants was told about the existence of the Status Quo Bias. They quickly decided that the bias makes a lot of sense and accepted that most people succumb to it. At the same time, they believed that they did not personally fall victim to the bias and instead made perfectly rational and objective decisions.

Cognitive biases are part of human nature. Admitting that we have them is not a personal flaw or a sign of failure. We need to admit to their existence before we can address the issues that they raise.

When you are faced with decisions, take a quick second to think about whether you are choosing something just because it is the status quo or the default. Think about whether that choice is actually the best choice for you.

Were you automatically enrolled in your companies 401(k) plan? See if you can bump up your contributions. Check your asset allocation and see if you should be more aggressive with your investing.

Think about other areas where you may be subject to Status Quo Bias. If you can think of some examples, drop them in the comments to help the rest of us out.

Edit: Emily of The John and Jane Doe Guide to Money & Investing has an article this morning discussing how stockholders should treat mergers. She points out that holding on to the new company’s stock just because it is the status quo can be dangerous, as was the case for the companies purchased by Enron in the lead up to its collapse.

20 thoughts on “Why We Have Trouble Making a Change”

  1. I just landed here from Mr.Tako’s blog. This is my first article reading in here and I can see myself nodding with lot of things in here.

    I have to admit that I was on contract with AT&T (for long enough), but I think I realized about this status quo bias and ever since switching to low cost providers like Lycamobile, Ting etc.

  2. At times I wonder what would happen if the top two vote getters from the primary made it to election day. I wonder with as much gerrymandering if this would shake up the status quo. For instance, DC basically elects their Mayor in the primary since nobody outside a Democrat stands a chance. I wonder if the two top vote getters were Democrats if that might cause more turnover since Republicans would choose the less bad candidate in their mind.
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  3. I always look forward to your posts, Matt. As always, I loved this one. It’s funny, as I was reading, I was thinking “yes, but it doesn’t happen to me”. Then I got to this: “…they believed that they did not personally fall victim to the bias and instead made perfectly rational and objective decisions.” Well, then. Maybe I do fall victim to the status quo bias and just don’t realize it! Like that stock I’m holding onto that I know I should sell, but I’ve justified keeping it to provide some “diversification”…hmmm.
    Amanda @ centsiblyrich recently posted…Do you need to take control of your money? You Need A Budget can help!My Profile

  4. Loved this! Uhg I think the biggest way bummer with my status quo ways is health insurance. Its so much easier to just keep what we have instead of shopping around even though i am 100% confident that there is something better/cheaper out there. Same thing goes for my phone service. Wah wah.
    Thanks for the reminder!

  5. What a great post, Matt. This is quickly becoming one of my most favorite blogs. That stat about Congress is horrifying. I am someone who gets very paralyzed by choice, on a good day. I stick with a lot of status quo decisions. Or non-decisions, I guess is more accurate. I can say that after 15 years of the worst ever 401K, I finally took matters into my own hands this year and rolled it into an IRA. Paid off almost immediately. You really inspired me to be more aware of this. Making decisions and changes is something I am so averse to, but it pays off. Gotta be a big girl sometimes!

  6. You make some great points. This is one reason I don’t have any subscriptions set for automatic renewal. I will probably choose to continue with Netflix, Amazon, etc., but I want ot at least make my own decision each year.
    Thanks for the reminder.

  7. Wow in my list of blog post ideas that I have stashed away, I had the exact same example and the exact same topic asking “what’s your default position?” I heard about the organ donor story from a behavioral economist (I believe Dan Ariely) and that was fascinating to me.

    Open enrollment at my company is coming up starting in 2 days and I definitely need to go over all of the information before selecting my benefit choices. I know I want to get an identity theft insurance, which is a new benefit, and have to make sure I make the right decision! Thanks for the post Matt!
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  8. It is an interesting thing to think about. Can status quo bias be applied to marriage? Divorce rates are already high in this country (around 50%). Would they be even higher if status quo bias didn’t exist?

    1. That’s an interesting line of thought. I suppose it could be, but the increase would have to be only marriages that people would be better off leaving. People with happy marriages would still stay in them regardless of whether or not status quo bias existed because it would continue to be the better objective decision.

      Thanks for the comment, Dennis.
      Matt recently posted…Why We Have Trouble Making a ChangeMy Profile

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