What is Status-Quo Bias? (SQB)
SQB is the cognitive/emotional bias that involves people preferring that things stay as they are or that the current state of affairs remains the same. And so they avoid / even resist any change.
People are generally scared of any change and unwilling to come out of their ‘ comfort zone’. This is a very natural human tendency to avoid any change as change can be perceived as a RISK.
Why does it happen? A few biases are at play here - Loss Aversion, Regret Avoidance and Decision Fatigue.
Loss Aversion - Psychologically, the pain of any loss is 2-3 times more than that of the same amount of pleasure of gain. So basically an investor is worried about any potential loss ( pain) the new decision is going to make. So to avoid any such loss/pain, they prefer the SQB.
Regret Avoidance - Again here taking any new decision can entail failing. And it can cause the REGRET. So to avoid any regret, we maintain the status Quo.
Decision Fatigue - In today’s modern world, we need to make a hell lot of decisions on a daily basis, which can set in the fatigue and again force us to maintain the SQ.
A few investing examples of the SQB
Below are the snapshots from screener.in about shareholding patterns.
This is the shareholding of IEX, a one-time darling of retail investors. Check the public holding has gone up from 34% to 61% in less than 3 years. And the number of shareholders has increased from 95k to a whooping 16 lakhs.
Here is another example of India Bulls Real Estate
The same pattern is seen here. So these are the perfect examples of SQB with Loss Aversion and herd Mentality playing all together.
So what is the solution for SQB?
Step 1 - Accept that SQB does exist. And this itself is a difficult thing. As Richard Feynman says -“The first principle is that you must not fool yourself — and you are the easiest person to fool.” So here you will need to have a good financial advisor / a broker / a friend who can critique your stock selection. Another option is to have an Investment Diary where you can enter all the reasons for your stock selection and your mistakes. And more importantly, keep on updating it & re-reading it.
Step 2 - Try to find out the reasons - Is it the loss aversion/regret avoidance/decision fatigue that is causing this SQB? Once you are able to find it, correct it to avoid the SQB.
Step 3 - Remember to cross-verify your investments with the checklists. It may so happen that the things / the thesis has changed from the time of initial investment.
The more I write on behavioural finance, the more I understand the importance of maintaining an INVESTMENT DIARY. It’s a MUST for retail investors. And second important thing is to APPLY CHECK-LIST before investing.
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