Probabilistic dominance and status quo bias

Gil Riella and Roee Teper ()

Games and Economic Behavior, 2014, vol. 87, issue C, 288-304

Abstract: 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.

Keywords: Probabilistic dominance; Status quo bias; Comparative status quo bias; Endowment effect; Home bias (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:87:y:2014:i:c:p:288-304

DOI: 10.1016/j.geb.2014.04.010

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