• Atakan Erdogdu

Status Quo Bias: Why do customers stick to the option they have already chosen?

As Samuel Jackson remarked, “To do nothing is within the power of all men”, individuals have a significant tendency to stick with the decisions they have already made. To put it into a real-life context, imagine your current cell phone plan. If a competitor offered a better option that provides exactly the same benefits at a lower price, imposes no costs of switching, and maintains your current cell phone number, would you switch to the alternative provider? Many people (76 percent), when asked, seemed to disregard the extra benefits that can be obtained from switching and articulated that they would not switch their plan. This occurrence is not limited to the cell phone payment plans, it is also widespread in the realms of saving and investment plans, brand choices, and insurance plans. For some reason, individuals have a strong tendency to prefer a familiar choice with less benefits over other alternatives, rendering them as having a bias towards the status quo.

Coca-Cola learned the importance of this bias the hard way. During the 1980s, the company’s market share was continuously falling, and it was forecasted that Pepsi would become the market leader in the soft-drink industry by 1990. To tackle this problem, Coke II was developed and in the blind taste tests, consumers preferred the new Coke over the older by a significant margin of 53 percent. Yet, when the product was finally released to the market, it was a disaster. The company was being flooded with angry phone calls that indicated the dissatisfaction with the product. In the course of three months, the new coke was taken off from the shelves, but the farcical decision costed the company around $34 million. Viewed through the lens of status quo bias, the result is unsurprising: the strong preference to stick with the familiar product lead customers into disregarding the enhanced taste experience that the new Coke offered. However, if the challenge of status quo bias is so influential, the fundamental question presents itself: How can we overcome it?

The Rationalist Explanation

The rationalist will posit that transaction costs can explain the status quo bias. The presence of transaction costs that is associated with switching between different alternatives can offset the benefits derived from the superior option. In addition, in the absence of explicit costs, uncertainty will have a similar effect. From the perspective of consumers, as they have not tried the better alternative, the benefits that can be gained from it are uncertain. Solely the usage of the service/product will make them gauge the quality of gains. Accordingly, the consumers react to this ambiguity by reactively devaluing the extra benefits the product offers. The costs associated with re-analyzing the offers can further explain this rationalist choice. It might be the case that customers are saving the cost of reanalysis as they stick to their previous choice, assuming that they have initially made the right decision. Therefore, these costs associated with choosing an alternative can indeed offset the to-be-obtained benefits, which, are inherently uncertain and devalued accordingly. As a result, the customer becomes actively and rationally biased towards the status quo. The implications for the practitioners within the rationalist point of view are twofold: (i) transaction costs associated with switching should be eliminated or reduced, and (ii) the effects of uncertainty ought to be alleviated using techniques such as free trials. Yet, reflecting from our life experiences, it becomes blatant that the factors rationalists suggest, except for transaction costs, are not the primary drivers behind the status quo bias, indicating that the answer lies elsewhere.

The Behavioralist Explanation

The behavioralist will divert the attention into perception, instead of monetary, values associated with switching. Think about the illustrated value function that depicts how differently losses and gains are perceived.

Graph 1. The Prospect Theory Value Function (source: Kahneman & Tversky, 1979).

The depiction reveals that an equivalent amount of loss is perceived as significantly higher, almost twice as much, then a similar amount of gain, which is referred to as loss aversion. Within the context of switching between alternatives, reference point represents the current choice of the customer and as the losses have more effect, the customer focuses on what can be lost by choosing the alternative, instead of what can be gained. This leads to a strong innate preference towards the status quo. In addition, the presence of sunk costs that represent the previous investment can provide another perspective. Sunk costs induce people to continue to choose suboptimal, or even failing, options because of the fact that they have already invested significant amount of their resources in it and giving up will be felt as admitting failure. Indeed, in choosing between alternatives, the loyalty to the brand and previous payments to receive the service can represent a sunk cost.

More important, but perhaps more subtle, is the effect of cognitive dissonance. In the domain of choices, consumers are characterized by their motivation to have consistency in their decisions, and they tend to justify past and current actions. Accordingly, cognitive dissonance, in itself, is the common observation of consumers behavior of mentally discarding or suppressing information that contradicts correctness of their past decisions. Reverting back to the telephone plan example, as the customer received a contradictory information that indicated (s)he is making an inferior decision, the information is disregarded to preserve cognitive consistency.

Therefore, the behavioralist explanation highlights a different and more effective part of the observed tendency of sticking to the initial choice. The combined effect of loss aversion, sunk costs, and cognitive dissonance is similar to a transaction cost. The difference, however, is that the costs are perceived by the customers. That is, these costs are non-existent in economic terms, but are borne in the minds of customers. Hence, behavioralist explanation suggests that practitioners should also consider the mechanisms of the consumers’ mind, and, if necessary, take steps such as framing the action of switching as a gain instead of a loss to overcome this subtle, yet substantially strong bias towards the status quo.

References and Further Readings

Kahneman, D. (1992). Reference Points, Anchors, Norms, and Mixed Readings. Organizational Behavior and Human Decision Process, 51(2), pp. 296-312.

Kahneman, D. and Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), pp. 263-291.

Khedhaouria, A., Thurik, R., Garau, C. and Heck, V. E. (2016). Customers’ Continuance Intention Regarding Mobile Service Providers – A Status Quo Bias Perspective. Journal of Global Information Management, 24(4), pp. 1-21.

Samuelson, W. and Zeckhauser, R. (1988). Status Quo Bias in Decision Making. Journal of Risk and Uncertainty, (1), pp. 7-59.

Thaler, R. (2016). Behavioral Economics: Past, Present, and Future. American Economic Review, 106(7), pp. 1577-1600.

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