Status Quo Bias in Decision Making

Most real decisions, unlike those of economics texts, have a status quo alternative—that is, doing nothing or maintaining one's current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science. 'To do nothing is within the power of all men." Samuel Johnson How do individuals make decisions? This question is of crucial interest to researchers in economics, political science, psychology, sociology, history, and law. Current economic thinking embraces the concept of rational choice as a prescriptive and descriptive paradigm. That is, economists believe that economic agents—individuals, managers, government regulators—should (and in large part do) choose among alternatives in accordance with well-defined preferences. In the canonical model of decision making under certainty, individuals select one of a known set of alternative choices with certain outcomes. They are endowed with preferences satisfying the basic choice axioms—that is, they have a transitive ranking of these alternatives. Rational choice simply means that they select their most preferred alternative in this ranking. If we know the decision maker's ranking, we can predict his or her choice infallibly. For instance, an individual's choice should nqt be affected by removing or adding an irrelevant (i.e., not top-ranked) alternative. Conversely, when we observe his or her actual choice, we know it was his or her top-ranked altemative. 0 WILLIAM SAMUELSON AND RICHARD ZECKHAUSER The theory of rational decision making under uncertainty, first formalized by Savage (1954), requires the individual to assign probabilities to the possible outcomes and to calibrate utilities to value these outcomes. The decision maker selects the alternative that offers the highest expected utility. A critical feature of this approach is that transitivity is preserved for the mote general category, decision making under uncertainty. Most ofthe decisions discussed here involve what Frank Knight referred to as risk (probabilities ofthe outcomes are well defined) or uncertainty (only subjective probabilities can be assigned to outcomes). In a number of instances, the decision maker's preferences are uncertain. A fundamental property ofthe rational choice model, under certainty or uncertainty, is that only preference-relevant features ofthe alternatives influence the individual's decision. Thus, neither the order in which the altematives are presented nor any labels they carry should affect the individual's choice. Of course, in realworld decision problems the alternatives often come with influential labels. Indeed, one alternative inevitably carries the label status quo—that is, doing nothing or maintaining one's current or previous decision is almost always a possibility. Faced with new options, decision makers often stick with the status quo alternative, for example, to follow customary company policy, to elect an incumbent to still another term in office, to purchase the same product brands, or to stay in the same job. Thus, with respect to the canonical model, a key question is whether the framing of an alternative—whether it is in the status quo position or not—will significantly affect the likelihood of its being chosen.' This article reports the results of a series of decision-making experiments designed to test for status quo effects. The main finding is that decision makers exhibit a significant status quo bias. Subjects in our experiments adhered to status quo choices more frequently than would be predicted by the canonical model. The vehicle for the experiments was a questionnaire consisting of a series of decision problems, each requiring a choice from among a fixed number of alternatives. While controlling for preferences and holding constant the set of choice alternatives, the experimental design varied the framing ofthe alternatives. Under neutral framing, a menu of potential altematives with no specific labels attached was presented; all options were on an equal footing, as in the usual depiction ofthe canonical model. Under status quo framing, one of the choice alternatives was placed in the status quo position and the others became altematives to the status quo. In some ofthe experiments, the status quo condition was manipulated by the experimenters. In the remainder, which involved sequential decisions, the subject's initial choice self-selected the status quo option for a subsequent choice. In both parts of the experiment, status quo framing was found to have predictable and significant effects on subjects' decision making. Individuals exhibited a significant status quo bias across a range of decisions. The degree of bias varied with the strength ofthe individual's discernible preference and with the number of alternatives in the choice set. The stronger was an individual's preference for a selected alternative, the weaker was the bias. The more options that were included in the choice set, the stronger was the relative bias for the status quo. STATUS QUO BIAS IN DECISION MAKING 9 To illustrate our findings, consider an election contest between two candidates who would be expected to divide the vote evenly if neither were an incumbent (the neutral setting). (This example should be regarded as a metaphor; we do not claim that our experimental results actually explain election outcomes.^) Now suppose that one of these candidates is the incumbent office holder, a status generally acknowledged as a significant advantage in an election. An extrapolation of our experimental results indicates that the incumbent office holder (the status quo alternative) would claim an election victory by a margin of 59% to 41%. Conversely, a candidate who would command as few as 39% of the voters in the neutral setting could still earn a narrow election victory as an incumbent. With multiple candidates in a plurality election, the status quo advantage is more dramatic. Consider a race among four candidates, each of whom would win 25% of the vote in the neutral setting. Here, the incumbent earns 38.5% of the vote, and each challenger 20.5%. In turn, an incumbent candidate who would earn as little as 9% of the vote in a neutral election can still earn a 25.4% plurality. The finding that individuals exhibit significant status quo bias in relatively simple hypothetical decision tasks challenges the presumption (held implicitly by many economists) that the rational choice model provides a valid descriptive model for all economic behavior. (In Section 3, we explore possible explanations for status quo bias that are consistent with rational behavior.) In particular, this finding challenges perfect optimizing models that claim (at least) allegorical significance in explaining actual behavior in a complicated imperfect world. Even in simple experimental settings, perfect models are violated. In themselves, the experiments do not address the larger question of the importance of status quo bias in actual private and public decision making. Those who are skeptical of economic experiments purporting to demonstrate deviations from rationality contend that actual economic agents, with real resources at stake, will make it their business to act rationally. For several reasons, however, we believe that the skeptic's argument applies only weakly to the status quo findings. First, the status quo bias is not a mistake—like a calculation error or an error in maximizing—that once pointed out is easily recognized and corrected. This bias is considerably more subtle. In the debriefing discussions following the experiments, subjects expressed surprise at the existence of the bias. Most were readily persuaded of the aggregate pattem of behavior (and the reasons for it), but seemed unaware (and slightly skeptical) that they personally would fall prey to this bias. Furthermore, even ifthe bias is recognized, there appear to be no obvious ways to avoid it beyond calling on the decision maker to weigh all options evenhandedly. Second, we would argue that the controlled experiments' hypothetical decision tasks provide fewer reasons for the expression of status quo bias than do realworld decisions. Many, if not most, subjects did not consciously perceive the differences in framing across decision problems in the experiment. When they did recognize the framing, they stated that it should not make much of a difference. By contrast, one would expect the status quo characteristic to have a much greater impact on actual decision making. Despite a desire to weigh all options evenhand10 WILLIAM SAMUELSON AND RICHARD ZECKHAUSER edly, a decision maker in the real world may have a considerable commitment to, or psychological investment in, the status quo option. The individual may retain the status quo out of convenience, habit or inertia, policy (company or government) or custom, because of fear or innate conservatism, or through simple rationalization. His or her past choice may have become known to others and, unlike the subject in a compressed-time laboratory setting, he or she may have lived with the status quo choice for some time. Moreover, many real-world decisions are made by a person acting as part of an organization or group, which may exert additional pressures for status quo choices. Finally, in our experiments, an alternative to the status quo was always explicitly identified. In day-to-day decision making, by contrast, a decision maker may not even recognize the potential for a choice. When, as is often the case in the real world, the first decision is to recognize that there is a decision, such a recognition may not occur, and the status quo is then even more likely to prevail. In sum, many of the forces that would encourage status quo choices in the real world are not reproduced in a laboratory setting.' Critics might complain, however, that our laboratory decisions were unrepresentative. To this charge we have no definitive answer. However, in Section 2, we report on two field studies involving the actual choices of employees of Harvard University in choosing health coverage and of faculty members nationwide on the division between TIAA (bonds) and CREF (stocks) for their retirement investments. Both studies discovered significant status quo bias. We leave to future research the task of identifying the characteristics of decisions that make a strong status quo bias likely. The range of explanations for the existence of status quo bias (Section 3 presents an extensive discussion) suggests that this phenomenon will be far more pervasive in actual decision making than the experimental results alone would suggest. The status quo bias is best viewed as a deeply rooted decision-making practice stemming partly from a mental illusion and partly from psychological inclination. Some examples of status quo effects in practice should be instructive. A small town in Germany. Some years ago, the West German government undertook a strip-mining project that by law required the relocation of a small town underlain by the lignite being mined. At its own expense, the govemment offered to relocate the town in a similar valley nearby. Government specialists suggested scores of town planning options, but the townspeople selected a plan extraordinarily like the serpentine layout of the old town—a layout that had evolved over centuries without (conscious) rhyme or reason.'' Decision making by habit For 26 years, a colleague of ours chose the same lunch every working day: a ham and cheese sandwich on rye at a local diner. On March 3, 1968 (a Thursday), he ordered a chicken salad sandwich on whole wheat; since then he has eaten chicken salad for lunch every working day. Brand allegiance. In 1980, the Schlitz Brewing Company launched a series of live beer taste tests on network television (during half times of National Football STATUS QUO BIAS IN DECISION MAKING 11 League games) in an effort to regain its reputation as a premium beer. (It had fallen from second to fourth place in market share.) A panel of 100 confirmed Budweiser drinkers (each had signed an affidavit that he drank at least two sixpacks of Bud a week) were served Budweiser and Schlitz in unmarked containers and asked which they preferred. Schlitz's advertising gamble paid off. On live television, between 45 percent and 55 percent of confirmed Budweiser drinkers said they preferred Schlitz. Similar results were obtained when confirmed Miller drinkers participated in the test.̂ The decisions made in these examples display a strong affinity for the status quo. Offered a score of plans, citizens duplicated the layout of their town. The lunchtime diner's relationship with his chosen sandwich has outlasted several marriages. Taste notwithstanding, beer drinkers are loyal to their chosen brands. In each case, status quo bias appears to be operating. The historical layout of the town, owing little or nothing to city planning, is likely to be highly inefficient for twentieth-century life. Nonetheless, the old plan is preferred to presumably superior alternatives, even when the cost of svntching is negligible. Conceivably, any layout would have been retained simply by virtue of a centuries-long history. If so, this is a violation of the canonical model of decision making. Similarly our lunchtime companion appears to be a creature of habit, which may rule out any meaningful exploration of his genuine preferences. How does one explain the one-time switch in his consumption decision? Did he abandon ham and cheese deliberately or on a whim? Or was ham unavailable that day, forcing him to accept an alternative choice, which he then discovered he preferred? Beer drinkers are not the only consumer segment loyal to its chosen brands. The greatest marketing error in recent decades—the substitution of "new" for "old" Coca Cola—stemmed from a failure to recognize status quo bias.^ In blind taste tests, consumers (including loyal Coke drinkers) were found to prefer the sweeter taste of new Coke over old by a large margin. But the company did not think about informed consumer preferences—that is, their reactions when fully aware of the brands they were tasting. Coke drinkers' loyalty to the status quo (Coke Classic currently outsells new Coke by three to one) far outweighed the taste distinctions recorded in blind taste tests. In short, so far as marketing was concerned, blind taste tests, despite their objectivity (or, more aptly, because of it), proved to be irrelevant. We have attempted to test the strength of status quo effects experimentally and to speculate on their significance. The paper is organized as follows: Section 1 contains a discussion and analysis of the controlled experiments. Section 2 examines status quo bias in two field studies. One study examines the choice of health insurance plans by Harvard employees. The other examines the division of retirement contributions between TIAA and CREF funds of faculty throughout the nation. To examine status quo bias in each case, we compare the choices of new enrollees as opposed to those who have already made choices. Section 3 draws on economics and psychology to provide explanations for the status quo bias. Section 4 considers a range of applications. 12 WILLIAM SAMUELSON AND RICHARD ZECKHAUSER 1. Experimental tests Controlled experiments were conducted using a questionnaire consisting of a series of decision questions. Each question begins with a brief description of a decision facing an individual, a manager, or a government policymaker, followed by a set of mutually exclusive altemative actions or policies from which to choose. The subject plays the role of the decision maker and is asked to indicate his preferred choice among the altematives. In many ofthe decisions, one altemative occupies the status quo position. In Part One ofthe questionnaire, the wording ofthe decision problem frames one of the altematives as the status quo. That is, the status quo labeling is exogenously given. In Part Two, subjects face a sequential decision task. In an initial decision, each subject chooses from a set of alternatives. This choice becomes the self-selected status quo point for a subsequent decision.