Status quo bias, and the uncertainty of your success

Status quo bias, and the uncertainty of your successTyler Cowen, an economist and author, thinks our preference for the status quo is one of our costliest biases. I heard him make that claim in an interview he did with Ezra Klein.

It’s easy to frame status quo bias as a form of risk aversion. And I think that’s right. Change is risky. We fear the down-side risks of change much more than we appreciate the up-side opportunities. 

I want to take that analysis in a slightly different direction.

With excess risk aversion, we’re talking about two possibilities:

  1. We overestimate the probability of a bad thing happening.
  2. We overestimate the impact if a bad thing does happen.

What I want to talk about is the flip side. We can make at least three different mistakes in assessing the up-side of change:

  1. We can underestimate the probability of success.
  2. We can require too much certainty to make a change. (In other words, we might think we need a 90% chance of success to justify our effort, even though a 70% chance of success would suffice.)
  3. We can underestimate the impact of achieving success. Either the success is worth more than we previously believed, or we ignore all the adjacent successes we could accumulate by following a new path.

The status quo bias is more than just a general fear of bad stuff happening. I think this bias is rooted in economics. Specifically, because we aren’t guaranteed a return on the energy it would take to change, we avoid change. We’re making a skewed economic judgment, for which we pay a considerable price.

Decision-making as a form of applied economics

Decision fatigue is a real thing. We pay a price, in the form of glucose depletion, for every decision we make. So we’re judicious with our decision-making. We rely on habit to avoid unnecessary decision fatigue.

As Barack Obama once said,

You’ll see I wear only gray or blue suits…I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make.

A decision is simply a choice between alternative uses of the same resources. Take lunch as an example. You could go to the deli for a sandwich, or you could go to the Chinese place for some fried rice. You’re weighing things like the time it will take, the price, what you’re in the mood for, etc.

Decisions can, of course, get way more complex. Try to decide on who to marry. Or whether to have children, and if so, how many. Try to decide whether to stay at your ho-hum job or take a chance on a new one.

Ultimately, you’re playing a game of economics. You have finite resources. You need to deploy those resources in a way to maximize your return. One huge obstacle is you’re rarely certain about the return of any particular choice. You rely on intuition and heuristic to guide you, with a healthy preference for the status quo.

Success is expensive, and even when you pay the price, it’s not guaranteed

Think about humanity’s most visible accomplishments. What it did take to make them happen?

Time. Lots of time. And sometimes lots of money.

Take Albert Einstein’s development of general relativity. He published his work in 1915 and 1916, when he was 36 and 37 years old. While he was still a very young man, it took decades of deep thought to shape his theory.

Yes, he was a singular genius. But it still took him an enormous amount of time.

Take the automobile. Let’s look at two specific examples. One is the Ford Edsel, the late 1950s project on which Ford suffered a multi-billion dollar loss (in today’s dollars). The other is Tesla, where Elon Musk and his team are sinking billions of dollars into electric vehicles for the masses.

Both Ford and Tesla invested incredible sums of money to push forward the design and manufacture of automobiles. Ford’s investment took place over several years, and performed miserably. Tesla’s investment has spanned over a decade, and is trending in the right direction, but the ultimate outcome is still in doubt.

Both efforts have enormous consequence. Even with the brightest, most experienced minds tackling the challenge, it takes years and billions of dollars. And even then, spectacular failure is a real possibility.

Status quo bias comes from unreasonable expectations of certainty

Why does the status quo bias exist? Because most people, in most situations, can’t justify paying the price for only a shot at success. They focus on the Edsel, on the case where you spend years of your life, and tons of money, and end up with nothing.

The funny or sad thing is, depending on your perspective, that’s exactly how success works. There is no recipe. It’s never guaranteed. It doesn’t matter how smart or rich you are. You could very well flush your resources down the toilet trying to achieve something that never materializes.

Personally, I think this is a key dimension for classifying people. Some people, when they fail to see a guaranteed path to something better, won’t even try:

• Why try to lose weight, when there’s no guarantee your diet and exercise plan will give you the results you want, in the time you want?

• Why switch jobs, when you may end up disliking the next one even more than you dislike this one?

• Why try to learn a new language, when you’re already “old” and lack the mental dexterity of a child? 

In isolation, any one of those decisions may seem reasonable. In the aggregate, though, you’ve settled deeply into the status quo bias. You never make a change, because there’s always a chance the change won’t work out. Your resources (time, money, discipline, etc.) are so precious, it would be a travesty to waste them on something that didn’t yield a return.

The status quo bias is called a bias for a reason. It’s not rational. We consistently overestimate the probability of success required to justify a change. We demand too much certainty. We would be happier, on balance, if we spent our resources for chances of success that we currently think are too speculative.

Keep that lesson in mind as you navigate through your career. Think like an executive. You have finite resources you can invest. Not all investments are going to work out. But if you place the right bets, in the right ways, you can achieve an impressive aggregate return.

Don’t fear the losses. They’re inevitable. People smarter and richer than you have suffered greater losses than you ever will. If you play the game of life not to lose, you can pretty much ensure that you’ll never win.

Leave a Reply

Your email address will not be published. Required fields are marked *