Status quo bias with choice overload

Abstract

This paper proposes a model that parsimoniously captures evidence on status quo bias, the reference effect and choice overload. Choice overload is behaviorally defined as an increase in intensity of status quo bias when the menu enlarges. Our decision maker follows a two-step procedure by first limiting consideration to the alternatives that weakly dominate the status quo according to a menu-dependent list of attributes, and then maximizing preference over this subset with tie breaking in favor of the status quo. Choice overload is generated by the key feature that the list of attributes is increasing in menu size. An axiomatic characterization and three applications are provided. In particular, a policy maker has to nudge the agent through a series of small changes in her choice problems. An incumbent firm can deter entry by exploiting choice overload, while an entrant firm can introduce new product more efficiently using information on attention.