Affection for the status quo

This bias is the basis of the idiom "Better the devil you know than the devil you don't know."

These experiments have found a strong difference toward an investor's stated portfolio preferences if the question is framed in such a way that the investor is given a default option of some sort, or a status quo. When asked about how they would invest $100,000, a group of investors will usually come up with one set of preferences, based on their own investment knowledge. For example, the group might favour stocks or property, or more conservative options. If the question is rephrased as "you have $100,000 invested into a bond fund, you must choose what you want to do with this money", the investors in the study suddenly develop a great affinity for bonds, in fact a huge majority of investors would leave the money in the bond fund, even the same guys who just now were talking about how they preferred investing in stocks.

There are several reasons. First of all people hate having to make choices. This was demonstrated in other experiments that find the more options a person is given the more likely they are to do nothing. If you find a TV you want being sold really cheaply, you might buy it. Experiments have shown that if a person walks into a store and finds two TVs that are equally good and both a really great bargain, they will in fact probably not buy anything at all. When the choice is easy (one good TV, buy or not?), the customer will buy. When the choice is harder (now have TWO bargains to pick, both excellent), the shopper will in all likelihood decide to keep shopping around.

Why do people hate choice so much? It is because fear of making the wrong choice is a very important fear. When there is only one TV the choice is clear, when there are two the consumer may regret his choice. The pain of making a wrong choice is so overwhelming that the person would prefer not to make the choice at all.

Most super funds offer a middle-of-the-road default option. This might be called "balanced" or "core" or something of that nature, but the overwhelming majority of investors would prefer not to have to make the choice right now, and will go with the default. It has nothing to do with risk aversion, most have no real idea of the risk characteristics of the choice they have made, but even when much better portfolio options are given, the investor would rather leave it, "for another six months and see how it goes."

Term deposits and bank cheque accounts also keep large balances because people fear choice. Risk has nothing to do with it, a bank account with a major bank may well be about as safe as any investment can be, but a cash management trust is not far behind. Why do people keep $20,000 in their cheque account earning 0.5% interest, even when that money is not needed for immediate expenses? Because there are a bewildering variety of cash management trusts out there and nobody wants to choose the wrong one.