Status Quo Bias – The Great Wealth Destroyer

A few weeks back in Mental Accounting – a Help or a Hinderance? we started to delve into the fascinating world of Cognitive Biases, and how they can be hazardous to your financial health. Well now that you’ve got that one conquered, its time to attack and defeat one of the most common and most wealth destroying biases of them all….. doing nothing – otherwise known as Status Quo Bias.

The essence of status quo bias is that people prefer for things to remain the same – even when the cost of changing is low, and the reward for change is great.

Allow me to rephrase…

People will give up tens of thousands, or in many cases hundreds of thousands of dollars in savings or investment returns because they are too comfy doing nothing, or too scared to do something!

The godfathers of behavioural economics, Daniel Khaneman, and Amos Tversky linked status quo bias to loss aversion, observing that people feel greater regret for bad outcomes that result from new actions taken than for bad consequences that are the consequence of inaction (Kahneman & Tversky, 1982). Humans are indeed strange creatures!

The worst thing about status quo bias is that our inaction is brought about because:

a) There are no immediate consequences of doing nothing.
b) Opportunity cost isn’t always highly visible.
c) There is a misconception that small changes won’t make much of a difference

Well i have to tell you that small differences, make a MASSIVE difference to your long term wealth, so its time to stop procrastinating.

Let me give you a few examples:

• Refinancing your $500,000 home loan and getting a 0.5% better interest rate saves you $54,245 over a 30 year loan term.
• Paying off an extra $200 per month (1.5 coffees a day) on the same home loan saves another $66,216 and knocks 4 years & 2 months off your loan term.
• Ensuring you’re not over-insured (Life Insurance, TPD, and Income Protection) can save you upwards of $10,000 p/a! (particularly once you’re in your 50’s & 60’s)
• Reducing your super fund investment fees from 1.2% to 0.8% = $85,509 in extra retirement savings. (But be aware – sometimes you get what you pay for. Cheaper is not always better)
• Achieving an 1% better return in the same super fund (8% as opposed to 7%) makes you $234,884 better off after 30 years! (say from age 35 to 65)
• Making $1000 extra concessional contributions to the same super fund makes you a further $88,155 better off! (and that doesn’t include the tax & cashflow benefits!)
• Those $1000 p/a super contributions could be funded by savings on your utility bills & general insurances by using one of the many comparison websites available.

These small tweaks produce a combined benefit of $529,009 and we’ve only just scratched the surface.

It may not be easy to see these savings or potential returns when you’re not looking for them, but its my job to help you find them and unlock the hidden opportunities that could make a major difference to your life.

It’s one thing for status quo bias to eat away at at your potential benefits (and if you hadn’t read this maybe you’d never even know), but where it becomes a much bigger problem is when inaction causes you to prolong your exposure to significant risk or loss.

Now i hate examples like this, and i hate when salespeople sell based on fear (damn rental car insurance people!) – but this stuff is real, and i’d be doing you a disservice to pretend that these scenarios didn’t exist.

• You have never reviewed your personal insurances (Life, TPD, and Income Protection), but then you have a serious accident that results in your inability to work. You find out that your benefit isn’t enough to cover your debt repayments on your mortgage, and your partner needs to reduce their work hours to care for you. You are forced to sell your home.
• You are in a Industry Super fund with the default unitised life insurance cover for $280K…. but you’re a surgeon and that is only the equivalent of 12 months salary. When you die unexpectedly, your spouse receives one lousy year of your wages with which to pay off your debts, and cover the family living expenses – which you used to fund 80% of.
• You and your partner are tragically killed in a car accident, but you never got around to making a will. The public trustee decides how your estate is distributed.
• You approach retirement age, and you discover that your Super was invested in a ‘conservative’ fund earning 4.0% p.a as opposed to a balanced fund earning 7.0%. This Status Quo Bias oversight cost you $449,422.
• You work in a highly specialised field and never bothered to look at the TPD definitions of your income protection policy – when you have an accident that prevents you working in your field, you attempt to make a claim only to discover this piece of fine print:

“You’ll be considered totally and permanently disabled if:
› solely because of your illness or injury you haven’t been able to work in any job for at least three months in a row since you became ill or injured, and › you’re getting treated by and following the advice of a medical practitioner* for your illness or injury, and › at the end of the three months in a row, your injury or illness means that you’re incapable of ever working in any job that you’re suited to based on your previous education, training or experience, or any job that you may reasonably become suited to with further education, training or experience”

*Even though i should reference this quote, i’ll do the Industry fund in question the courtesy of not calling them out.

Remember how you used to be a surgeon? Well thanks to some ‘further eduction, training, and experience’ from your friendly Industry super fund you now work in a call centre.

Do you know that marketing departments tap into your Status Quo Bias and use it to relieve you of potentially hundreds of dollars a month paying for products or services do don’t even want or need anymore?

Thats right, remember when you signed up for that ‘free trial period’ for a product / service because you wanted to use it on a one off / short-term basis? Notice there wasn’t an option to opt out at the sign up stage? You don’t opt in to ongoing monthly fees, you have to actively opt out… except you don’t because its only $10 a month, or $30 a month, and it is direct debited from your credit card so you hardly even notice…. until you add it up! I’M GUILTY AS CHARGED. Here is a list of recent changes i’ve made to cull unnecessary expenses incurred because of Status Quo Bias.

• Turned off VPN Express (i used it once for a business trip to China)
• Turned off eBay store fees for an account i used to have but no longer use
•  Closed a Commbank account i never use (but top up with $10 a month every month to cover fees)
• Cancelled an ongoing debit for a domain name i have registered but have never used
• Cancelled a wine club membership that delivered 12 bottles of wine i don’t even like every 3 months.
• Downgraded an internet plan cause i’m paying for data i never use.

OK, i’ve ‘fessed up, but what about you?

• Your unread magazine subscription?
• Your extra users on your Netflix account?
• Your extra Foxtel channels that don’t get used?
• The paid up front gym membership that doesn’t get used?

Doing nothing is literally costing you a fortune, so its time to get motivated and time to take some action. Get in touch today to have a chat about your personal situation, and see if we can uncover some of the massive opportunities being hidden behind your status quo bias. It will be a small investment in time for present day you, and a MASSIVE reward for future you.

*Home loan savings are based on a $500,000 P+I owner occupied home loan, 30 year  loan term, 5.0% interest rate with monthly repayments, being reduced to 4.5% (all other terms remaining equal)

*Superannuation improvement examples based on 30 year returns, $60,000 starting balance, and a pre-tax salary of $75,000. SGC contributions begin at 9.5% in year and scale up to 12% in line with the proposed superannuation changes. Does not take into account the impact of insurances held within superannuation. Annual super admin fees are $78.00, and the investment fees are 1.2% (vs 0.8% in the savings example).