How to beat your sta­tus-quo bias


The Washington Post Sunday - - G3 - BY BOB FRICK

Psy­chol­o­gists have la­beled our col­lec­tive hu­man sloth the sta­tusquo bias. And stud­ies show that this ten­dency to stick with what we al­ready have is par­tic­u­larly harm­ful when it comes to in­vest­ing. Too of­ten we cling to the sta­tus quo when fig­ur­ing out how much to save for re­tire­ment or when to change our in­vest­ments, for ex­am­ple.

But mak­ing such mo­men­tous de­ci­sions isn’t easy. And on the face of it, choos­ing among thou­sands of stocks and mu­tual funds to fill our port­fo­lios is a “pre­pos­ter­ous” task, says Barry Schwartz, pro­fes­sor of psy­chol­ogy at Swarth­more Col­lege and a de­ci­sion­science guru.

A few sim­ple steps, how­ever, can markedly im­prove our de­ci­sion mak­ing. Sur­pris­ingly, the most ef­fec­tive way to beat the sta­tus-quo bias is to pro­cras­ti­nate. When we are prompted to make a quick de­ci­sion, hu­man na­ture nudges us to­ward a de­fault op­tion; a lit­tle de­lay of­ten helps us pick a bet­ter al­ter­na­tive. Ac­cord­ing to re­search by psy­chol­o­gist Niels van de Ven of the Til­burg In­sti­tute for Be­hav­ioral Eco­nom­ics Re­search in the Nether­lands, sub­jects chose the de­fault op­tion 82 per­cent of the time when asked to de­cide im­me­di­ately but only 56 per­cent of the time af­ter some de­lay.

De­lay­ing a few days lets us con­sider a de­ci­sion when we’re well-rested and in a dif­fer­ent mood. And don’t un­der­es­ti­mate the im­por­tance of a good night’s sleep, says psy­chol­o­gist Christo­pher Chabris, co-author of “ The In­vis­i­ble Go­rilla . . . and Oth­er­Ways Our In­tu­itions De­ceive Us.” Stud­ies have shown that “fa­tigue has huge neg­a­tive ef­fects on de­ci­sion mak­ing — much worse than you would ex­pect,” he says.

Nar­row the field

Schwartz, author of “ The Para­dox of Choice: Why More Is Less,” coun­sels that nar­row­ing your field of choices is also a good move. Hav­ing too many al­ter­na­tives is not just con­fus­ing, it can ac­tu­ally make you de­pressed. Schwartz thinks Fidelity’s prepack­aged Free­dom mu­tual funds, which in­clude dif­fer­ent types of stocks, bonds and other in­vest­ments, are aptly named. “ They mean free­dom from choice, not free­dom to choose,” he says.

Nar­row­ing your op­tions when it comes to in­vest­ments is cru­cial. With­out some method­ol­ogy, pick­ing mu­tual funds from among the more than 24,000 avail­able be­comes the pre­pos­ter­ous task Schwartz sug­gests. Such an over­whelm­ing se­lec­tion leaves us vul­ner­a­ble to be­ing in­flu­enced by a laun­dry list of psy­cho­log­i­cal bi­ases, in­clud­ing over­con­fi­dence, short-term think­ing and herd men­tal­ity.

Set­tle for less

Schwartz has an­other de­ci­sion­mak­ing strat­egy that com­bats sta­tusquo bias while mak­ing it eas­ier to pick in­vest­ments and make fi­nan­cial de­ci­sions. It’s the idea of be­ing a sat­is­fi­cer in­stead of a max­i­mizer, a dis­tinc­tion coined by psy­chol­o­gist Her­bert Simon in the 1950s. A max­i­mizer will con­sider ev­ery pos­si­bil­ity in the end­less pur­suit of per­fec­tion — and in so do­ing can suc­cumb to anal­y­sis paral­y­sis — while a sat­is­fi­cer uses a set of cri­te­ria to make good choices, but doesn’t worry that some­thing bet­ter ex­ists.

When in­vest­ing, max­i­miz­ers chase re­turns, which of­ten re­sults in buy­ing high and sell­ing low. Their port­fo­lio turnover is high, jack­ing up costs as well as anx­i­ety. And they of­ten con­cen­trate on just a few as­sets they think will do best and ne­glect di­ver­si­fi­ca­tion.

But a sat­is­fi­cer, Schwartz says, re­al­izes that pre­dict­ing the per­for­mance of spe­cific in­vest­ments is a fool’s game. Sat­is­fi­cers sleep easy with well­diver­si­fied port­fo­lios that give “a good­e­nough re­turn in the broad­est pos­si­ble cir­cum­stances,” he says.


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