Rotman Management — Spring 2017

rotmanmagazine.ca / 101

An individual who is subject to the status quo bias prefers

either the current state or some choice alternative that has

been made salient as the default option that will apply if no

alternative is selected explicitly. For example, in a set of ex-

periments on portfolio choices following a hypothetical in-

heritance, researchers found that an option becomes signifi-

cantly more popular when it is designated as the status quo,

while others are designated as ‘alternatives’.

When neither choice alternative is made salient as a

passive default choice, sometimes, the focal choice becomes

the one that is easiest to process. The greater comfort that

individuals have with easily-processed choice alternatives

probably lies in the fact that we prefer choices about which

we can feel competent.

Another principle that has emerged from the research is

that when there is a single clear-cut focal choice alternative,

people evaluate choice alternatives that deviate from the

MOST OF US RECOGNIZE THAT, generally
speaking, people fear change and the
unknown. We prefer familiar goods and
people, status quo choices, and gambles
that seem unambiguous. What some peo-
ple might not realize is that these effects
are not only manifested in the realm of consumer goods, but
also in capital markets.
My co-authors and I recently set out to develop a model
based upon two underlying psychological forces:

1. The tendency for individuals to use a ‘focal choice’ as a
   benchmark for comparison in evaluating other possible
   choices. We refer to this focal choice option as the status
   quo; and


2. The tendency to skeptically evaluate choice alternatives
   that deviate from the status quo.

Fear of the Unknown:

Familiarity, Risk and

Economic Decisions

FACULTY FOCUS Bing Han, Professor of Finance, Rotman School of Management