The Status Quo Bias Is Holding You Back

The status quo bias states that when people face choices, they have a tendency to pick the option that extends their current situation which is also known as the status quo. Therefore, in this video, we’re going to do what we always do, which means we'll talk about what the status quo bias is, how and why it affects you as an investor, and most importantly, what you can do to fix it.

As I mentioned, the status quo bias states that people have a tendency to pick options that extends their current situation. That means we usually prefer to keep things the way they are, even if we could benefit from making certain changes.

A great way to illustrate this is by looking at the law of inertia from physics. It states that if a body is at rest, it will remain exactly where it is unless it is acted on by an outside force. So it will only move or change direction if it is forced to do so from outside. The status quo bias works in a similar way, except that instead of random objects, we’re pushing around behavior patterns.

We all sometimes experience psychological inertia, i.e., inner resistance to change. However, just like in physics where different bodies experience different levels of inertia, some of us need more force from outside to move than others.

The first reason for why that happens is because it is quite simply the easiest way to go in most cases. If everything stays the way it is, we don’t have to change our behavior, get used to anything new, and we can limit the risk of being worse off in the future than we are right now.

Another reason that causes the status quo bias is loss aversion. That is, we have a tendency to do whatever we can to avoid losses. This is important here because whenever we make decisions, the status quo is our reference point. Thus, when we change something, we can either lose or gain something because of it. The risk of losing something is what makes the status quo so appealing.

That brings me to the third reason: the endowment effect. This effect states that we place a higher value on things once we own them than we would place on the same things if we didn't own them. That has a lot to do with loss aversion, but it also introduces some interesting new aspects. The things we own also help to define who we are. Thus, giving up ownership of something can also affect your self-image.

The important thing to take away from this is that depending on how strong these factors and biases are, their combination can result in a really strong tendency to keep things the way they are, even if that comes at a cost.

The consequences this has for you as an investor are quite simple. It can cause you to remain too passive. That is, it can lead you to either hold on to losing assets for too long or prevent you from investing in promising new opportunities. Essentially, the status quo bias will cause you to just sit things out and hope for the best.

Now, that obviously doesn't mean you should always sell everything you have and just blindly hop on every hype train that comes by. In fact, sticking with something that has worked well for you in the past is often a reasonable strategy, and the status quo can be a good, if not the best option. But, there are certain situations where you should change things up as an investor, whether that be to protect yourself against unnecessary losses or to profit from promising new opportunities. And in those cases, the status quo bias can become a liability.

So, let’s talk about how you can fix that.

First and foremost, you have to be aware that this bias exists, and that it affects you, at least to a certain extent. Maybe not as much as it affects others, but it does affect you too. A good way to increase your awareness is to challenge your decisions. For example, you find that you don't want to pursue a certain investment opportunity after doing your research, ask yourself if your arguments really hold up or whether it's mostly your gut feeling that’s holding you back. This can also serve as a good validator for your decisions in general.

In addition to that, always do the math. Oftentimes one of the arguments that support the status quo is that it allows you to save transaction costs, like trading or withdrawal fees. In those cases, it’s important to crunch the numbers and calculate your possible gains and losses. More often than not you will find that the fees are peanuts compared to the possible gains or losses.

Finally, take your time when making decisions. This is something I find extremely useful to overcome the status quo bias. I don’t like to make decisions when I’m in a rush. In those cases, I always have this fear of missing an important point, that seems obvious in retrospect. So I’d rather stick with the status quo and avoid future regret. Thus, the more time you give yourself, the more you can think everything through. So time can give you the peace of mind and certainty you need to move forward and overcome the status quo bias.

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