The Endowment Effect, Status Quo Bias and Loss Aversion: Rational Alternative Explanation

The endowment effect, status quo bias, and loss aversion are robust and well documented results from experimental psychology. They introduce a wedge between the prices at which one is willing to sell or buy a good. The objective of this paper is to address this wedge. We show that the presence of asymmetric information in a rational-agent framework can account for the endowment effect, status quo bias and loss aversion as well as psychology-based explanations proposed in the past.Endowment effect, Status quo bias, Loss aversion, Asymmetric information, Bid/ask spread

Status Quo Bias: Is it Human Habit to Prefer the Current Situation and Abhor Changes?

Status quo bias is a cognitive bias found in many fields including business, economics, political science, sociology, and psychology just to mention a few. It is a situation where people choose to do nothing or maintain current or previous decisions without a change. However, in today’s world, change is one among the things that are constant; thus, organizations and individuals need to develop the capability to change so as to capitalize on new opportunities that emerge from changes. The study in this paper has used content analysis to arrive to its findings which were obtained from books, peer review journals, reports and Internet information sources. The research question to be examined is whether the preference of status quo bias is a human nature or the laziness of human consciousness on making sound decisions. Findings show that status quo bias, though preferred most does not help rational decision making when individuals choose among alternatives. Thus, in order to make rational and informed decisions, individuals shouldn’t have a bias towards sticking to the old but should show some characteristics that advance positive changes. Keywords: Status quo bias, Changes, Rational decision making

Rationally Biased Learning

Are human perception and decision biases grounded in a form of rationality? You return to your camp after hunting or gathering. You see the grass moving. You do not know the probability that a snake is in the grass. Should you cross the grass - at the risk of being bitten by a snake - or make a long, hence costly, detour? Based on this storyline, we consider a rational decision maker maximizing expected discounted utility with learning. We show that his optimal behavior displays three biases: status quo, salience, overestimation of small probabilities. Biases can be the product of rational behavior

Cognition in Seemingly Riskless Choices and Judgments

The assumption of given and known preferences and possibilities so common in economic theory stands in contradiction with the kind of unsystematic change that charaterizes many experimental and real situations. Consequently the theory misspecifies rational choice and generates many puzzles relating to marginal analysis, sunk costs, judgments of fairness, the endowment effect, etc. We instillate rational cognition and learning in seemingly riskless choices and judgments. Preferences and possibilities are given in a stochastic sense and based on revisable expectations. The theory predicts experimental preference reversals and passes a sharp econometric test of the status quo bias drawn from a field study. En sciences économiques, l'hypothèse que les préférences et les possibilités sont connues et données est largement contredite par des changements peu systématiques observés dans plusieurs expériences et situations réelles. La conséquence est que la théorie ne semble pas spécifier correctement la rationalité des choix et pose aux économistes plusieurs paradoxes reliés à l'analyse marginale, aux coûts historiques, sur les jugements de justice, sur les effets de dotation ou de statu quo, etc. Dans cette étude, nous concidérons la rationalité cognitive et l'apprentissage dans des situations de choix et de jugements apparemment sans risque. Les préférences et les possibilités sont données dans un sens stochastique et elles sont basées sur les anticipations qui sont révisées. La théorie proposée prédit des renversements de préférence dans les expériences et passe avec succès un test économétrique sur données réelles du paradoxe du biais du statu quo.

Asymmetric dominance, deferral and status quo bias in a behavioral model of choice

This paper proposes and axiomatically characterizes a model of choice that builds on the criterion of partial dominance and allows for two types of avoidant behavior: *choice deferral* and *status quo bias*. These phenomena are explained in a unified way that allows for a clear theoretical distinction between them to be made. The model also explains the *strengthening of the attraction effect* that has been observed when deferral is permissible. Unlike other models of status quo biased behavior, the one analyzed in this paper builds on a *unique*, reference-independent preference relation that is acyclic and generally incomplete. When this relation is complete, the model reduces to rational choice.PostprintPeer reviewe

Referendum Design, Quorum Rules and Turnout

In this article, we focus on the consequences of quorum requirements for turnout in referendums. We use a rational choice, decision theoretic voting model to demonstrate that participation quorums change the incentives some electors face, inducing those who oppose changes in the status quo and expect to be in the minority to abstain. As a result, paradoxically, participation quorums decrease electoral participation. We test our model’s predictions using data for all referendums held in current European Union countries from 1970 until 2007, and show that the existence of a participation quorums increases abstention by more than ten percentage points.Referendum Design; Voter turnout

Is the psychology of high profits favorable to industrial renewal? Experimental evidence for the theory of transformation pressure and Schumpeterian economics

The theory of transformation pressure sheds light on the importance of negative driving forces for economic growth and the countercyclical movement in innovations and productivity growth. The theory suggests that firms have a status-quo bias in periods of increasing profits leading to lower productivity growth. Firm agents are governed by changes in current profits through historical relativism, the peak-end rule and overconfidence. They will first abandon a status-quo bias after an actual decline in profits though both under- and overreaction is possible. On the other hand Schumpeterian economics stress that firm renewal is speeded up during recoveries, e.g. by psychological reasons. The two contradicting hypotheses were tested by a role play where a group of university students in economics completed a questionnaire acting as managers for an established company. The students had the opportunity to choose between different growth strategies and define the underlying psychological mechanism. The questionnaire also provided room for rational considerations. The role play confirmed the theory of transformation pressure more than Schumpeterian economics but primarily that the students expected that they would have reacted rationally as managers.Transformation pressure; Schumpeterian economics; peak-end rule; historical relativism; productivity growth; overconfidence; bounded rationality; the business cycle; heuristic decision rules; role play

Insurance Risk Classification in an Era of Genomics: Is a Rational Discrimination Policy Rational?

I. Introduction II. Theoretical Underpinnings and Foundation of Insurance Regulation III. Policy Approaches ... A. Prohibitive Approach ... B. Status Quo Approach ... C. Rational Discrimination Approach ... 1. United Kingdom Moratorium and Concordat ... 2. Australian Guidance ... 3. U.S. Uniform Law Commission Proposal IV. Risk Classification and Economic Efficiency ... A. Classifying Risk ... B. Why Insurers Classify Risks ... C. Choosing a Risk Characteristic ... 1. Statistical Considerations ... 2. Operational Considerations ... 3. Social Considerations V. Genetic Test Results and Insurance ... A. Genetic Test Results as Risk Characteristics ... B. Current Use of Genetic Test Results ... 1. Insurer Access to Genetic Test Results … 2. Insurer Use of Genetic Test Results VI. Are Transparency and Oversight Necessary? ... A. Insurer Misuse of Genetic Test Results ... B. Transparency of the Insurance Market ... C. The Arms Race of Risk Classification ... D. Fear of Genetic Discrimination VII. Standards of Evidence ... A. Uniform Law Commission Draft ... B. U.K. Moratorium ... C. Australian Guidance ... D. Additional Considerations ... 1. What Types of Evidence Are Sufficient? ... 2. How Should the Context of Genetic Tests Come into Play? ... 3. Should Relevance Be Measured by Marginal Added Value? ... 4. How Should Preventive and Treatment Measures Be Taken into Account? ... 5. How Should Variants Within a Gene Be Considered? VIII. The Case for a Rational Discrimination Approach ... A. Prohibitive Approach Comparison ... B. Status Quo Consideration IX. Conclusio