Behavioral finance FAQ / Glossary (Status quo)

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Dates of related message(s) in the
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Year/month, d: developed / discussed,
i: incidental

Status quo bias



03/8i - 073i + see delaying,
adjustment, underreaction,

anchoring, cognitive dissonance,
habit, endowment + bfdef2

When to make a move is taboo.

Definition:

The status quo bias (*) is a rather common human tendency not to make
or accept any change
of practice, opinion, decision or habit.

even if they would help to adapt to a new situation or change
   positively that situation.

This bias shows an attachment to past
behaviors, analyses,
beliefs, anchoring,
commitments
(see those words), even when they prove
erroneous, counterproductive or unsustainable.

Let us admit it, this hides quite often, under a variety of pretence
(rationalization), or even vested interest,
an emotional reaction
or a pure reflex.

Yes, a reflex : once connections get wired inside the brain there is a
near physical tendency not to alter them.

(*) Also called:

 * reluctance to change (one's own behavior)
 
* resistance to changes (that affect one's own situation or environment),
 * conservatism bias, opposition to reform
and correct organizations
    or practices).

  *  mental paralysis, neglect, indifference or stubbornness).

Why such a negative attitude against change?

What chains are holding the feet?

Physical? Cognitive? Emotional?


This reluctance, indifference, paralysis (or at least feet-dragging: see delaying
tactics, underreaction...) to decide changes or to adapt to them, is more or
less present among most people
.

There are of course vested interests (the cost of abandoning old
physical investment or the fear of losing old knowledge, know how,
and sometimes employment).

However "rational" is this, but in a very narrow way, it brings also various 
illusions(see for example the "sunk cost fallacy").

Actually, this hostility against adaptation to evolutions is far from
being fully rational. Actually if the unwanted exogenous change happens
anyway
, it would have been smarter:

* to be among the first to admit it,

* to be ready to take advantage of the new situation

(of course unless if this would be an unethical collusion with some thugs)

* to weigh on its orientation so as it brings more benefits and to lessen its
  
drawback for all.

Many other causes, even less rational, are also possible and can
reinforce one another:

Near physical bias (inertia)

Mere neglect, laziness, mental

inertia,procrastination, indifference,

Comfort found

in keeping habits, while to
change them needs big efforts,

Comfort also found in staying 

with familiar and well known
aspects of 
the situation, even
when evidences 
show that they
do not persist.

Emotional biases

Self doubt , instinctive

    fear and mental
    paralysis,

An emotional bias towards

a belief or purported certainty 

(fear of a plunge into the
unknown, even if keeping the
present situation is also a step
into uncertainty)
,

Loss aversion ...after the 

asset value already fell,

Commitment (see 
    that word) to past actions,

Endowment (see that word)
    in existing property,

Some nostalgia,

Stubbornness,

Overconfidence, pride,

    ego...

Cognitive biases

Mental anchoring on old
   references,

Cognitive dissonance,
   
denial of reality.





The effects

Feeling safe with what we are used to do?

Or being blind to evolutions?

The conservative attitude can have diverse effects:

  To trust traditional / classical solutions more than new ones
          can
have some rationality

When the future is so uncertain (see uncertainty) that it

might be overconfident to pretend we know the new
path is a true opportunity.

Or when a bit of wait and see allows to prepare

better, so as to limit pitfalls and draw more benefits
from the new orientation. An opportunist trick ;-)

But it becomes a dangerous bias when it blatantly
           denies technical and social
evolutions as well as one's own
           interest.

It can even lead to prefer something bad but well
known and largely practiced to something good but
unfamiliar.

Social aspects

A lot of things are easy to move,

society is not one of them.

The reluctance to change is not only found in individual attitudes and
behaviors, but also in social activities
: politics, business,
sciences, ethics, religions, arts.

Power and weakness of minorities

In many social fields, the push for change, either backwards or
forwards, rational or irrational,
usually stays, for a long period,
limited to active minorities.

If those people do not reach the "critical mass" (see
percolation),
many of the social changes (whether good
or bad) they promote have more chance to abort than
to emerge (see emergence).

In the case of politics, this can make those minorities radical
and violent or use stealthy or deceptive tricks, whatever the
relevancy or irrelevancy of the changes they want.

Common economic and financial examples

From the reluctance to buy new things
to the reluctance to sell old ones,
and to the reluctance to move one's ideas.

Consumers and innovations.

Except for "early adopters", consumers usually avoid to buy cars or
other equipments with expensive and not fully tested gadgets, even if t
hey might be useful.

Therefore, except for rare instant crazes, a long time might be
needed
foran innovation to break through , emerge,
"percolate"
(see percolation) by reaching the general public.

It might even never break the resistance (for good or bad reasons),
never get popular, and abort, this is quite frequent, either early or at
the end.

Investing.

Another example of conservatism, rather biased and unproductive, is
that many investors stack most of their hard earned money in
savings accounts or money funds.
Those placid instruments give them a sense of value stability.

Therefore they shun, as if they were wild, equity investments even
if they might be preferable as they usually perform better on the long
run (*)

(*) Except when bought carelessly and emotionally in a bubble,
      when
it would be smarter to prefer safe and liquid assets.

Also the status quo bias is one of the causes of the reluctance to sell

(or the "endowment effect": see that phrase).

Economic paradigms.

Here we have the general case of sciences. It took 14 centuries to get
rid of the Ptolemaic theory and adopt the Copernican / Galileo / Kepler
approaches.

Also economic notions such as value or capital for example, took much
time to evolve from their old coarse understanding.

A more recent example is how long it took for behavioral
finance findings to complement, if not replace the "standard
finance"
market efficiency theories. Only the financial crisis
starting in  2007 opened the eyes of the bulk of academics
and professionals.

Of course the resistance is not totally irrational as the vested interest of
some theorists from the "old school" can intervene

Impact of the status quo bias
    on money management

Snail race on the money road.

The status quo bias / conservatism bias has various effects on money
management:

Financial analysts often adjust too slowly their

   previous estimates when new information should have made

them reanalyze the situation and prospects (see adjustment),

Investors tend to underreact (see underreaction) and delay
   the
needed changes in their portfolio composition when the

market situation has evolved.


All this leads to "undertrading" (in reference to the opposite
bias, overtrading, see that word).

This causes market return and pricing anomalies such as
stickiness and trends.

On the same line of ideas, when overreaction is at play, if a previous
buying or selling decision was
made too early instead of waiting for
more data, the investor tends to stay anchored on its new assessment,
even if additional data show otherwise.
Here, we have the opposite behavioral cycle: overreaction, an urge to
change
when it is not needed (a form of hyperactivity), is followed by
underreaction and reluctance to correct the misstep.

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enter your query in "search archives".

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