Probabilistic dominance and status quo bias

- We study status quo bias in the presence of uncertainty.
- The model presented differs from the standard Knightian model in that it allows for compromises relative to the status quo.
- A behavioral characterization is provided.
- The applicability of the model is demonstrated in a set up of portfolio choice.

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.