[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

The Status Quo Bias Loss aversion and endowment effects lead to behavior
that exhibits a bias in favor of the status quo. In the example just given, the status
quo or reference point of the first person is the $1,100 he had, so he feels worse off
when he has only $1,000. The reference level of the second person was $900, so she
feels better off when she has $1,000. In the basic model of consumer choice outlined
in this chapter, we assumed that individuals’ utility depended on the absolute level
of their consumption. If reference points are important, utility may instead depend
on the difference between an individual’s current consumption and a reference level
of consumption. This reference level might be recent levels of consumption—a certain
standard of living to which people become accustomed. Or it might be the consumption
levels of an individual’s peer group, an idea captured in the phrase “keeping
up with the Joneses.”
The tendency of individuals to accept whatever happens to be the default among
a number of options illustrates the importance of the status quo. For example, many
employers offer their employees the option of participating in a 401(k) savings plan,
a way to set aside before-tax income for retirement. If the default is automatic participation,
so that employees must actively decide to opt out of the plan, then most
employees end up contributing. If the default is to not participate, requiring employees
to sign up for the plan, the fraction of employees who participate is much lower.
Ignoring status quo effects may undercut major public policy initiatives. In 2003,
the U.S. federal government introduced a medical drug benefit as part of Medicare,
the health insurance program for older Americans. To obtain discounts on prescription
drugs, seniors had to sign up for a “drug discount card.” The default option was
to not sign up. According to a survey conducted by the Harvard School of Public
Health and the Kaiser Family Foundation, only about 10 percent of eligible seniors
had signed up by the middle of 2004. The status quo effect may have been one factor
at work.
Implications These examples, and many others that behavioral economists
have investigated, suggest the economist’s simple model of choice is incomplete. But
what is critical for an analysis of market economies is understanding how the behavior
uncovered by psychologists and behavioral economists affects market demand
curves. Do we need to change the basic ideas developed in this chapter about how
consumers respond to changes in prices? Broadly speaking, the answer is clearly
no. Individuals do respond to incentives—as the price of a good falls, we expect more
consumers will purchase it. As price rises, less is demanded. The findings from
behavioral economics do suggest, however, that preferences can depend on what
individuals view as the status quo, and that consumers may display a greater reluctance
to change than the basic economic model would predict. This reluctance to
change, reflected in the endowment effect and the status quo effect, may reduce
their sensitivity to incentives. These effects may help explain why economists often
observe individuals passing up the opportunity to make exchanges that appear to be
advantageous.
Behavioral economists have developed new insights into saving behavior, as well.
We will consider some of them in Chapter 9, where we will discuss the factors that
affect household decisions about how much to save.
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