Status quo bias (SQB) is the increased propensity of a decision maker (DM) to choose an alternative because it is the status quo, or default option. SQB has been shown to affect many important economic decisions, such as the choice of electrical service provider, car insurance, investment portfolio, and 401(k) pension plan. The power of status quos has led governments and firms to begin using defaults as a policy instrument to "improve" the decisions that people make, on the basis that such interventions represent a "benign" form of paternalism. Yet recent behavioral evidence has suggested that people's ability to make good decisions may break down in larger choice sets, leading to an increase in SQB. In large choice sets people may choose a status quo that they would never choose in smaller choice sets. Such behavior violates current models of SQB and throws into question the claim that status quo manipulation is benign.
This paper proposes, axiomatically characterizes and tests a class of models that capture the increasing power of status quo bias as choice set size increases. These models are based on the psychological concept of decision avoidance: the selection of a status quo as a way for a DM to avoid a difficult or aversive decision. This concept focuses on the role of the status quo as a default option, or the outcome that occurs if no action is taken. It allows for SQB to be more prevalent in larger choice sets if such sets represent a more difficult choice for the DM. The decision avoidance class of models makes starkly different predictions to existing models of status quo bias, which focus on the role of the status quo in affecting preferences. The central difference between the two classes of explanation is that preference-based models assume that DMs will make consistent choices for a fixed status quo, whereas decision avoidance models assume that the only possible effect of making an object a status quo is to cause a DM to switch to choosing that object.
Using a unified experimental design, this paper shows that decision avoidance models do capture behavior in large choice sets. As the size of a choice set increases, subjects switch their choices away from other options and towards the status quo. This behavior is in line with decision avoidance, but violates the predictions of preference-based models. The switch towards the status quo appears to be driven by the sheer number of alteratives in the choice set, rather than the difficulty in selecting amongst these alternatives. Even when the size of the choice set is increased by adding stochastically dominated lotteries, subjects still switch to selecting the status quo.
Although decision avoidance models capture choice behavior in large choice sets, this paper shows that preference-based models are needed to understand behavior in small choice sets. The most striking finding is that a stochastic status quo can have an extreme effect on risk preferences. The introduction of a somewhat risky status quo can lead people to choose a much riskier option, even to the extent of exhibiting risk-loving behavior. However, this effect is only apparent in small choice sets. As the size of the choice set increases, subjects switch away from the extremely risky alternative and back to the status quo.
Both of these findings have implications for the implementation of 'benign' paternalism. In small choice sets, the finding that a somewhat risky status quo can lead people to choose a very risky option may act as a caveat to those proposing that defaults be used to encourage 401(k) savers to move away from low yield money market funds. In large choice sets, subjects may choose an object when it is the status quo over an option that they may robustly 'prefer' in small choice sets, suggesting that SQB can override well-formed preferences.
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