Fear of the Unknown: Familiarity, Risk and Economic Decisions
MOST OF US RECOGNIZE THAT, generally speaking, people fear change and the unknown. We prefer familiar goods and people, status quo choices, and gambles that seem unambiguous. What some people might not realize is that these effects are not only manifested in the realm of consumer goods, but also in capital markets.
My co-authors and I recently set out to develop a model based upon two underlying psychological forces:
1. The tendency for individuals to use a ‘focal choice’ as a benchmark for comparison in evaluating other possible choices. We refer to this focal choice option as the status quo; and
2. The tendency to skeptically evaluate choice alternatives that deviate from the status quo.
An individual who is subject to the prefers either the current state or some choice alternative that has been made salient as the default option that will apply if no alternative is selected
