Key points💥🚨
Status quo bias and the endowment effect are systematic errors in human thinking that, especially when combined, can lead to resistance to change, often resulting in missed opportunities.
These biases can lead us to stick with familiar choices, even if they are less effective or outdated.
Understanding and challenging these biases helps open doors to new possibilities, especially in the growing field of digital finance.
Have you ever wondered why we cling to familiar options, even when better options are readily available? Welcome to another installment of our series on the science behind crypto misconceptions, where we explore how the biases inherent in human thinking can shape our decisions, sometimes leading to suboptimal outcomes. In this blog, we’ll examine how status quo bias and the endowment effect can work together to reinforce our aversion to change. Whether it’s sticking to familiar ways or hesitating to experiment with digital assets, these biases reveal why it’s so hard to let go of the familiar. However, awareness and understanding can lead to better choices and outcomes.
The Science Behind Our Stubbornness: A Double Barrier to Change
Status quo bias refers to a preference for the familiar, leading people to stick with what they already have rather than try something new. Psychologists believe this bias comes from a deep-rooted desire for security and predictability—when something feels familiar, it often feels “safer.”
Consider a person who takes the same route to work every day. Even though he knows a new shortcut that might save a few minutes on his commute, he may avoid it because he is already used to his current route. Since he knows the familiar route so well, he may stick to it even at the expense of time.
Meanwhile, the endowment effect, a very similar phenomenon, leads people to overvalue things simply because they own them or have invested in them in some way, regardless of the objective value of the item. This effect becomes stronger when a significant amount of time or resources have been invested, making it more difficult to part with the item, even when replacement is more practical.
Imagine someone who owns an older car that requires frequent and expensive repairs. Each repair reinforces their attachment to it, as they feel that the time and money they spend should add to the value of the car. The time, effort, and money they put into maintaining it makes it seem more worthwhile to keep, even though from a financial perspective it is a poor investment. The market value of the car continues to decline, and the frequent repairs cost more over time than investing in a newer, more reliable model. This constant cycle makes it difficult for the owner to realize that keeping the car is not really cost-effective.
Status quo bias and the endowment effect can together create strong resistance to change. Familiarity with the status quo provides comfort, while the endowment effect amplifies the perceived value of previous choices.
Is money king?
The belief that “cash is king” often stems from the combined influence of the endowment effect and status quo bias, which makes physical money seem like the safer option. For those who have relied on cash their entire lives, the familiarity with physical currency increases its perceived reliability. This association has nothing to do with any objective merits; rather, the endowment effect inflates the value of cash simply because it is a known and trusted asset.
Status quo bias can further entrench these attitudes and behaviors, making newer digital payment options like QR code transactions and instant bank transfers seem risky or unnecessarily complicated. While cash has long been the default, many countries are embracing digital payments so fully that clinging to cash has become inconvenient and impractical. In Sweden, for example, most establishments no longer accept cash, except in the form of coins. China has seen a similar shift, with QR code payments now standard in everything from supermarkets to street kiosks, as cash transactions become increasingly rare.
This “cash is king” mentality, while still applicable in some cash-centric regions, can prevent one from seeing the conveniences that digital payments offer, such as ease of use and enhanced security features. Status quo bias and the endowment effect make people cling to cash even when it is impractical, causing them to overlook the drawbacks. As more economies fully embrace digital money systems, this attachment to cash can lead to missed benefits and more inconvenience. Therefore, being aware of these biases can help people better adapt to evolving financial systems and embrace more efficient and modern payment options.
“Cryptocurrencies can never serve as a ‘real’ financial infrastructure.”
Similarly, status quo bias strongly influences how people view financial systems in general. Traditional institutions like banks and credit services are deeply rooted in society, making them seem inherently reliable and difficult to replace. Moreover, the endowment effect leads people to value these familiar systems more simply because they have relied on them for so long. As a result, many view newer alternatives like cryptocurrencies with skepticism, dismissing them as too experimental to be applicable.
Furthermore, attachment to traditional financial systems makes it difficult to see the benefits of cryptocurrencies. Together, these two biases reinforce the view that cryptocurrencies can never serve as “real” financial infrastructure. Contrary to this belief, cryptocurrencies can offer significant advantages that make them viable financial infrastructure, including faster transaction speeds, decentralized control, and increased access for individuals excluded from traditional banking services.
One promising application of cryptocurrencies is to provide financial services to the unbanked. In areas where traditional banking systems are difficult to access, expensive, or inefficient, cryptocurrencies could be a revolutionary alternative, creating meaningful change in ways that traditional finance has not been able to achieve.
By providing secure and accessible services, cryptocurrencies have become a vital tool for economic resilience where standard financial systems fail.
“Cryptocurrencies are not real assets and cannot hold value like traditional assets.”
For many people, the belief that cryptocurrencies are not “real” assets, and therefore lack value, can be reinforced by status quo bias and the endowment effect. Traditional banks and credit services feel familiar and deeply ingrained, making them seem undeniably reliable, while newer options like cryptocurrencies seem risky and experimental by comparison. Additionally, the endowment effect leads people to value these familiar systems more simply because they have relied on them for so long. However, value is subjective. Just because traditional assets feel safe does not mean they are inherently superior.
However, if traditional assets are truly unrivaled, why are so many young people embracing cryptocurrencies as a viable alternative? Recent data reveals that crypto owners are young, with 34% of them aged 25-34 and 20% aged 18-24, and are often drawn to digital assets for their innovative appeal and distinct financial benefits. While older generations may see traditional banks and investments as inherently trustworthy because there was no alternative until very recently, younger people may be less inclined to share this mindset. With fewer years invested in traditional financial systems, they are naturally less attached to traditional assets like stocks or bonds and more open to newer options. Status quo bias, which leads people to prefer the familiar, is weaker here as these younger investors have not had time to become deeply entrenched in established financial practices. Similarly, the endowment effect – where people overestimate what they already own – tends to play a smaller role, as younger investors have not amassed significant wealth in traditional assets.
As a result, young people are better positioned to look at cryptocurrencies in a new light, and to see their potential benefits without the same attachment to traditional systems. This widespread interest among younger, tech-savvy users signals a shift: cryptocurrencies are gaining ground as a modern asset class, especially for those willing to look beyond traditional systems.
Final Thoughts
Status quo bias and the endowment effect can have a powerful impact on how we perceive value, guiding us toward what is familiar while preventing us from trying out potentially rewarding alternatives. In finance, these biases reinforce attachment to traditional assets, sometimes making newer options like digital assets seem risky or experimental. However, as we have seen, embracing emerging technologies like cryptocurrencies can provide financial benefits that traditional systems may overlook.
While change can be scary, understanding these biases helps us navigate a rapidly evolving financial landscape with a more balanced perspective. This is where resources like Binance Academy come in, helping to counter these mental traps with quality information. Did you find this article helpful? Stay tuned for the next article in our Cryptocurrency Misconceptions series!
Further reading
Cryptocurrency Demystified: Why Digital Assets Are Really Valuable
The Science Behind Cryptocurrency Misconceptions: The Anchoring Effect
Cryptocurrency Owner Portrait: What We Know About the Early Web3 Majority
Disclaimer: Contains third party opinions. Not financial advice. May contain sponsored content. See terms and conditions.