Benefitting from status quo bias ::Business Line,

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After nearly 15 years since it began, “Simple Economics” changes its name to “Mind Matters”. The name change reflects the character of the column- discussing behavioural biases in decision making. As you are aware, mind and its quirkiness, indeed, matter when it comes to decision making! This week, we discuss why individuals prefer status quo.

Consider this. You are recruited by a company for a certain job. The company policy requires you undergo a one-month intensive training. After a week, however, the company makes you an offer- you can quit if you are uncomfortable with the job. If you take the offer, you will be paid salary for the period plus a bonus! What will do you do?

You will most likely reject the offer, unless you really do not fancy the job. Why? For one, you would have done some research about the company before you applied for the job. Unless you gathered something about the company during the training that you are uncomfortable with, you will most likely stay. For another, you have to look for another job if you accept the offer to quit. What if you do not get one or do not the like the other job as well?

This argument, the apprehension of finding a better job, is a strong reason why most people prefer to stay. Behavioural psychologists call this Status Quo bias. It refers to our preference to maintain status quo, even if it is sub-optimal. One reason for such behaviour is plain inertia. Another could be that we want to avoid the regret of making a wrong decision, accepting the offer and then not finding a better job, for instance.

INVESTMENT DECISIONS

We suffer from Status Quo bias when it comes to our investment decisions as well. Consider the retirement plan in the US offered by companies to their employees. In most cases, employees are required to actively seek enrolment into the plan. Status Quo bias, perhaps, led to many employees not requesting for such an enrolment, even if it meant giving-up matching contribution from their employer!

Behavioural economists, hence, devised an opt-out plan to help employees build their retirement savings. In an opt-out plan, the employees have to take effort, request in writing, to opt-out of the plan. And because of the Status Quo bias, most did not opt-out, thereby, building their retirement savings!

Incidentally, a US-based online shoe retailer called Zappos started the practice of offering bonus and salary to its new recruits to quit their job, if they wanted to, during the training period. Not more than 10 per cent of the employees reportedly accepted the offer!