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

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 in which each subject made 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 can be 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 highest probability of winning the biggest possible reward when there is no default. The observed reversal in risk attitudes is explainable by a large class of Koszegi-Rabin (2006) reference-dependent preferences.