Probabilistic Dominance and Status Quo Bias
No 5864, Working Paper from Department of Economics, University of Pittsburgh
Decision makers have a strong tendency to retain the current state of affairs.This well-documented phenomenon is termed status-quo bias. We present theprobabilistic dominance approach to status-quo bias: an alternative is considered acceptableto 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 andbehaviorally characterized in a choice model that allows for a range of status quo biases,general enough to accommodate unanimity, but also standard expected utilitymaximization. We present a comparative notion of "revealing more bias towards thestatus quo" and study its implications to the probabilistic dominance model of choice.Lastly, the model is applied to the endowment eff ect phenomenon and to a problem ofinternational portfolio choice when investors are home biased.
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