Status Quo Bias
In the series of 21 behavioural biases we will discuss the 15th
bias “Status Quo Bias”
Status Quo Bias is also known as default effect. Law of Inertia is at
work.
We find comfort in everything “as it is” in other words we
like to keep things (at home or work) at same place as we find them convenient
to access. Convenience is key driver of this bias!! Are you taking the same
route every day? Are you using the same product regularly? Aren’t you using
same method of working daily? If the answer to such questions are yes than you
have Status Quo Bias.
Law of Inertia deters you to try new things/route/methods
etc.
While many habits are good to have but few are dangerous for
personal development and growth. Modern economics has powerful quote “Change is the only constant thing”
Recall how many have lost their jobs and career when computer were introduced
in India and they kept resisting change. What’s happening to our Kaali Peeli
Taxis and Rickshwas with Uber and Ola? Online travel, Books, Food delivery and
many time and labour saving devices are few of many examples which made people
with status quo bias, fully redundant.
How many of you have bought latest Microwave oven and
explored various recipes? 90% use it to just warm food or make Pizzas. Come on
you didn’t buy expensive Microwave for just warming food😊😊 . Same is true for
Mobile phones too. We buy latest device for its features and don’t use it
ultimately.
Millennia are quite sharp and adaptive to change so most
likely they will retain their Jobs and careers. Millennial try new things, new
places and products. They are also more focused and target oriented hence they
will have to be agile too.
Status Quo bias has significant impact on the Investment
habits also. Like many prefer assured return products over market linked
products, many prefer state owned LIC over other Insurance companies and
“Property as safe asset class”. I know people whose wealth is distributed among
Fixed return products and properties only. They preferred status quo of what
parents/others did. End result- lack of liquidity, diversification and poor
portfolio returns. They are still married to that Investment pattern and will
continue to suffer over longer period of time.😢 Even in equity investing, few
would prefer large cap or a particular sector only. They are also stuck with
their prejudice.
I would also like to talk about the high interest paying
corporate FDs, private debt placements and chit funds today.
There are investors who prefer to invest in corporate FDs,
lending to private parties and chit funds. Word FD and higher interest rates
drives their behaviour and decision. One must understand that few % extra
return can be harmful to your capital itself. If you have 10 lakh to
investments and you chose one of these, for extra 1-3% returns i.e 10000-30000
extra money you have put entire 10 lakh to risk. Than blaming Govt, RBI or SEBI
helps little. Imagine the trauma and stress that you may undergo. I am strong believer of no dealing with
small co-operative Banks also. Less is more in such cases✔.
Investor must move from perceived safety to perceived risky👍!! Ultra
HNIs have their portfolio being well balanced into Real estate, Debts (not FDs)
and equities (shares and MFs). Probably that’s the reason why they are where
they are and have created wealth for generations to come.
Typical asset allocation of the Investors with wealth in the
range of 5-10 crore would look like this- approx. 80-90% would be in property,
assured return instruments (including PPF, PF, gratuity, Insurance etc) gold
and maximum 20% would be in Equities. The equity allocation has scope to go up
to 30-35%. The equity allocation is capable of generating extra return which is
capable of beating Inflation and life style expns. One must sit with financial
advisor to select percentage allocation into various asset classes.
Advantage of diversification are many. Few listed below:
1)
Liquidity
2)
Tax efficiency
3)
Mitigation of risk
4)
Optimization of return
5)
Quick and easy opportunity of leveraging
6)
Helps in building all weather portfolio
As an Investor one must challenge status quo and consider
the benefits stated above and explore diversification in Investment. Start with
simple Mutual fund investing instead of AIFs, PMS or Art etc.
MF Trivia: Do you keep money in Bank a/c or short term FDs
for 1 week to 6 months?? Why don’t you explore liquid fund or Arbitrage funds
for better Tax adjusted returns with any day liquidity? Speak to me on how to
optimize the returns.
Greetings of Labh Panchami to you and your family
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This article
is written by Bhavesh D Damania founder of Wealthcare Investments.
"Risk comes until you know what, where and why you are
Investing"
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