When was the last time you switched or just considered switching your checking account? If it’s been many years, you’re not alone. According to a survey, the average American has had the same primary checking account for 16 years. 26 percent have used the same checking account for more than 20 years. That seems very long. Granted, as far finding better deals are concerned, the benefits of switching a checking account may not be large. But similar patterns occur for other financial products with more salient cost considerations, such as insurance policies—at a considerable cost to consumers.
While marketers may be tempted to emphasize customer ‘loyalty’ in these markets, behavioral scientists will more likely point to status quo bias—consumers’ tendency to stick with what they have. From this perspective, inaction is about more than just perceived switching costs or benefits. The justification “it’s not worth the hassle” is often more reflective of a general sentiment than a thorough cost-benefit analysis. Status quo bias is influenced by inertia (the path of least resistance—or laziness, more bluntly), a preference for the familiar, as well as not wanting to lose what we already own. The bias may be fueled further by choice difficulty when products are complex or when consumers are faced with many alternatives, as often the case in financial markets. Consumers may also fear to regret their choice.
So how can we help people take action? Richard Thaler, the Nobel Prize winning behavioral economist, usually emphasizes one way to nudge individuals into action: make it easy. Sometimes it’s just a matter of working with people’s inaction, as evident in pension auto-enrollment or setting up recurring monthly payments. We can also make action easier by simplifying choices and processes, ranging from pre-selected portfolios to pre-filled forms.
Morey Stettner discusses other approaches, such as financial advisors who make clients commit to future actions by agreeing on goals, time frames and due dates, or even pre-commit in the form of a signed contracts. This is reinforced further if advisors visualize positive outcomes for clients. For example, if a client promises to set aside tax-deferred funds on a monthly basis, the advisor can develop a timeline that shows how much more money the client can expect in retirement.
These general-purpose techniques to tackle inaction are not always effective for status quo bias, a form of inaction that is usually about a failure to switch from an existing choice to a new one. Since this bias frequently involves an aversion to loss, a different approach may be needed. The general consensus is that we should shift a person’s perceptions of loss due to a decision made to one that is about loss from not taking an action. As we quantify this loss, we can add urgency by including a time component—the cost of delaying action.
Traditional nudges, such as making actions easier or reframing the problem, tend to have one drawback. They rely on making changes in people’s decision-making environment rather than affecting their attitudes or beliefs. As a result, actions may lack the underlying motivation needed to make them meaningful and sustainable in the long term. At Syntoniq, we advocate an approach that also aims to trigger behavior from within. We believe that making people engage with their own decision-making psychology, including potential gaps between their values or goals and actual behavior, can be an effective tool to stimulate action.