Probabilistic dominance and status quo bias

Decision makers have a strong tendency to retain the current state of affairs. This well-documented phenomenon is termed status quo bias. We present the probabilistic dominance approach to status quo bias: an alternative is considered acceptable to replace the status quo only if the chances of a (subjectively) severe loss, relative to the status quo, are not too high. Probabilistic dominance is applied and behaviorally characterized in a choice model that allows for a range of status quo biases, general enough to accommodate unanimity, but also standard expected utility maximization. We present a comparative notion of “revealing more bias towards the status quo” and study its implications to the probabilistic dominance model of choice. Lastly, the model is applied to the endowment effect phenomenon and to a problem of international portfolio choice when investors are home biased.     

An impossibility result for virtual implementation with status quo

In this paper, virtual implementation is restricted to deliver, on the equilibrium path, either a socially optimal outcome or a status quo: an outcome fixed for all preference profiles. Under such a restriction, for any unanimous and implementable social choice function there is a dictator, who obtains her most preferable outcome as long as all agents prefer this outcome to the status quo. Further restrictions on the lottery space and the range of social choice functions allow the dictator to impose her most preferred outcome even when other agents prefer the status quo to this outcome.     

On the theory of reference-dependent preferences

A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahneman’s reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy conventional assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.     

Anonymous voting and minimal manipulability

We compare the manipulability of different choice rules by considering the number of manipulable profiles. We establish the minimal number of such profiles for tops-only, anonymous, and surjective choice rules, and show that this number is attained by unanimity rules with status quo.     

Status Quo Bias and the Number of Alternatives: An Empirical Illustration from the Mutual Fund Industry

We examine the extent of the status quo bias (SQB) in a real-world repeated decision situation. Individuals who are subject to the SQB tend to choose an alternative that they chose previously (i.e., their status quo), even if it is no longer the optimal choice. We examine the U.S. equity mutual fund market and find strong evidence of the SQB. Furthermore, the SQB is more severe in segments that have more funds to choose from. Thus, we deliver the first empirical confirmation of the experimental results of Samuelson and Zeckhauser [1988] that the SQB depends positively on the number of alternatives.     

Inter-temporal choices with temporal reference dependence

I develop an intertemporal choice model for rational deviators whose preferences depend not only on their actual consumption but also on comparison to their beliefs about the optimal consumption. The standard decision maker is loss averse with respect to this belief-dependent reference point. When psychologically weighted loss aversion is low, a decision maker deviates from the standard intertemporal choice behavior and over-consumption, as well as the alternative possibility of under-consumption can be rationalized. When the decision maker has time-varying degrees of loss aversion, he re-optimizes the consumption plan through adjusted beliefs as subsequent selves realize that past decision for the present period is no longer optimal. In the dynamic model, I solve for consistent intertemporal optimization rules by which a dynamic deviator should meet rational intertemporal consistency at each point in time. Finally, I demonstrate that the dynamic reference dependent model can solve a puzzling feature in lifecycle consumption data.     

A comparison of responses to single and repeated discrete choice questions

According to neoclassical economic theory, a stated preference elicitation format comprising a single binary choice between the status quo and one alternative is incentive compatible under certain conditions. Formats typically used in choice experiments comprising a sequence of discrete choice questions do not hold this property. In this paper, the effect on stated preferences of expanding the number of binary choice tasks per respondent from one to four is tested using a split sample treatment in an attribute-based survey relating to the undergrounding of overhead low-voltage electricity and telecommunications wires. We find evidence to suggest that presenting multiple choice tasks per respondent decreases estimates of expected willingness to pay. Preferences stated in the first of a sequence of choice tasks are not significantly different from those stated in the incentive compatible single binary choice task, but, in subsequent choice tasks, responses are influenced by cost levels observed in past questions. Three behavioural explanations can be advanced – weak strategic misrepresentation, reference point revision, and asymmetric value learning. The evidence is contrary to the standard assumption of truthful response with stable preferences.     

Status quo bias,multiple priors and uncertainty aversion

Motivated by the extensive evidence about the relevance of status quo bias both in experiments and in real markets, we study this phenomenon from a decision-theoretic prospective, focusing on the case of preferences under uncertainty. We develop an axiomatic framework that takes as a primitive the preferences of an agent for each possible status quo option, and provide a characterization according to which the agent considers a full-dimensional set of possible priors and abandons her status quo option only if she finds an alternative that returns a higher expected utility for each of these priors. We then show that, in this framework, the very presence of a status quo induces the agent to be more uncertainty averse than she would be without a status quo option.     

PROBLEMS IN MODELING COMPLEX DYNAMIC INTERACTIONS: THE POLITICAL REALIGNMENT OF THE 1850s*

This paper argues that a model of sequential choice is superior to the standard rational choice model in explaining a process as complex and dynamic as the political realignment of the 1850s. Part 1 sketches the facts and processes that need to be encompassed by a model and identifies key branching points. Part 2 describes an appropriate model of sequential choice and discusses procedures for estimating transition probabilities and the impact of key variables on these transition probabilities. Part 3 identifies implicit assumptions of rational choice theory that limit its usefulness.     

Cognitive constraints, contraction consistency, and the satisficing criterion

A theory of decision making is proposed that offers an axiomatic basis for the notion of “satisficing” postulated by Herbert Simon. The theory relaxes the standard assumption that the decision maker always fully perceives his preferences among the available alternatives, requiring instead that his ability to perceive any given preference be decreasing with respect to the complexity of the choice problem at hand. When complexity is aligned with set inclusion, this exercise is shown to be equivalent to abandoning the contraction consistency axiom of classical choice theory.     

Rationality,constitutions, and the ethics of rules

It seems clear that individuals stand to mutually benefit, in a wide variety of situations, from structuring their interactions in terms of constitutional practices. But a commitment to treat the rules defining such practices as setting real constraints on choice—a commitment to what could be characterized as an “ethics of rules”—is hard to reconcile with the standard, consequentialist theory of rational choice, which requires, in effect, that individuals regard any rule as providing no more than a “maxim” for choice. Such a theory of rational choice, then, constrains individuals to settle for a second best outcome in which choice is aligned with practice rules by means of strategies of precommitment and threats. The outcome is second best because such methods yield only partial alignment, and involve the expenditure of scarce resources, as well as a sacrifice of flexibility and freedom. To say this, however, is to identify the corresponding theory of rational choice as havingconsequentially unacceptable implications. A modified theory of choice is presented, which is still consequentially oriented, but which assesses consequences in a more holistic manner. It is then argued that this modified theory can provide a rational choice grounding for the needed “ethics of rules.” The author would like to thank three anonymous referees for their very helpful comments and suggestions.     

Social Security Reform with Heterogeneous Agents

This paper analyzes the quantitative role of idiosyncratic uncertainty in an economy in which rational agents vote on hypothetical social security reforms. We find that the role of a pay-as-you-go social security system as a partial insurance and redistribution device significantly reduces political support for a transition to an economy with a fully funded system. We conclude that the status quo bias in favor of an unfunded social security system is stronger in economies in which agents of similar age differ significantly with respect to labor earnings and wealth because of idiosyncratic income uncertainty. Journal of Economic Literature Classification Numbers: H55, E62, H3     

Common agency lobbying over coalitions and policy

This paper presents a theory of common agency lobbying in which policy-interested lobbies can first influence the choice of a proto-coalition and then influence the legislative bargaining over policy within that coalition. The equilibrium policy in the legislative bargaining stage maximizes the aggregate policy utility of the coalition members and the lobbies, but lobbying can also lead to the preservation of the status quo and lobby-induced gridlock. When the status quo does not persist, the policy outcome is largely determined by the selection of a coalition, since legislative bargaining under unanimity within the coalition leads to a coalition-efficient policy regardless of the identity of the proposer. An example is presented to identify the types of equilibria and provide a full characterization of an equilibrium.     

When Are Investors Rational?

Taking our cue from certain recent advances in experimental psychology, the authors propose a plausible theory of conflict between rationality and inherent behavioral biases of investors. In this theory no investor is fully rational or fully behavioral at all times. An investor faces a continuum between behavioral and rational positions. A movement toward rationality is a choice; it is costly to be fully rational which requires serious mental calculations. On the other hand, there could be some benefits to rationality in special circumstances that compensate for the costs. Using a unique and extensive investor-level database, the authors show that the degree of nonrationality decreases as rational behavior becomes more attractive. In the empirical setting, the proxy for rational behavior is investor's use of private predisclosure information during earnings announcement periods, while the disposition effect they display serves as an estimate of their behavioral bias. The paper contributes to the existing literature in several dimensions.     

Investment under Uncertainty in Dynamic Conflicts

This paper analyses a model in which two groups repeatedly compete with each other for a prize in every time period. We assume that there is a status quo bias: if there is a fight today, yesterday's winner is in a stronger position than the other group. Hence, a change of the status quo has long-term consequences that groups need to take into account. Important applications of this model include lobbying for legislation and political transitions through revolutions. We analyse the strategic timing of attacks on the status quo, which is similar to investment decisions under uncertainty. We find that the attack threshold is considerably lower than in a comparable one-period game, and that the expenditure level necessary to change the status quo is low in comparison to the prize; this provides a possible solution to Tullock's "rent-seeking paradox" in lobbying.     

Money matters: an axiomatic theory of the endowment effect

We develop a framework that allows us to state precisely the relationship between leading concepts of the theoretical and empirical research on reference-dependent preferences, namely the status quo bias, the endowment effect and the willingness to accept (WTA)/willingness to pay (WTP) gap. We show that a monetary version of the status quo bias is a necessary condition for the WTA/WTP gap, and show how to factor out the part of the gap due to income effects from the part of the gap due to the endowment effect. As a byproduct, we show that reference-dependent phenomena are generated by reference-independent factors, i.e., an underlying reference-independent preference relation the properties of which are discussed at length.     

Social-Self-Interest

This paper is about rational sociality. Retaining rational choice as its basic framework, it aims to enrich it by taking seriously a well-established cultural, social and psychological phenomenon: that some inter-personal relationships have intrinsic value. These are termed primary. Utility maximisation includes the binary choice to enter or not to enter a primary relationship: this on the one hand has a direct impact on utility, and on the other imposes restrictions on consumption choices. The model encompasses standard economic choice theory as a special case, while explicitly recognising that self-interested agents make choices that are sometimes group dependent. The broad scope of this approach is illustrated by a number of extensions and applications, some of which lead to distinctly unorthodox conclusions.     

Anchored preference relations

This note explores the implications of a simple and intuitive restriction on reference-dependent preferences assuming the status quo serves as the reference point. The condition imposed potentially rules out situations in which a decision maker has a choice between two prospects, selects one which subsequently becomes the new reference point, and then regrets her initial choice. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non-satiation in which all reference-dependent indifference surfaces are smooth. It is also shown that the condition does admit a class of non-trivial reference-dependent preferences.     

How quorum rules distort referendum outcomes: Evidence from a pivotal voter model

In many jurisdictions, whether referendum results are binding depends on legally defined quorum requirements. We use a pivotal voter model to examine the consequences of such requirements. We find that, although quorum rules differ in consequences, a status quo bias that is usually attributed need not be present and that quorum rules may work against the status quo. The rules can also both favor minorities and reduce voter turnout. Because quorum rules can create situations in which the secrecy of the vote is compromised, the door is opened to undemocratic forms of social and political pressure.     

The veil of public ignorance

A theory of cooperative choice under incomplete information is developed in which agents possess private information at the time of contracting and have agreed on a utilitarian “standard of evaluation” governing choices under complete information. The task is to extend this standard to situations of incomplete information. Our first main result generalizes Harsanyi's (J. Polit. Econ. 63 (1955) 309) classical result to situations of incomplete information, assuming that group preferences satisfy Bayesian Coherence and Interim Pareto Dominance. These axioms are mutually compatible if and only if a common prior exists. We argue that this result partly resolves the impossibility of Bayesian preference aggregation under complete information.