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Status Quo Bias and the Decoy Effect: A Comparative Analysis in Choice under Risk

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  • Miguel Costa-Gomes
  • Georgios Gerasimou

Abstract

Inertia and context-dependent choice effects are well-studied classes of behavioural phenomena. While much is known about these effects in isolation, little is known about whether one of them "dominates" the other when both can potentially be present. Knowledge of any such dominance is relevant for effective choice architecture and descriptive modelling. We initiate this empirical investigation with a between-subjects lab experiment that featured a single decision over two or three money lotteries. Our experiment was designed to test for dominance between *status quo bias* and the *decoy effect*. We find strong evidence for status quo bias and no evidence for the decoy effect. We also find that status quo bias is powerful enough so that, at the aggregate level, a fraction of subjects switch from being risk-averse to being risk-seeking. Survey evidence suggests that this is due to subjects focusing on the maximum possible amount when the risky lottery is the default and on the probability of winning more than the smallest amount when there is no default lottery. The observed reversal in risk attitudes is explainable by a large class of reference-dependent preferences.

Suggested Citation

  • Miguel Costa-Gomes & Georgios Gerasimou, 2020. "Status Quo Bias and the Decoy Effect: A Comparative Analysis in Choice under Risk," Papers 2006.14868, arXiv.org, revised Oct 2020.
  • Handle: RePEc:arx:papers:2006.14868
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    References listed on IDEAS

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