Science Behind Crypto Misconceptions: Status Quo Bias & Endowment Effect
Main Takeaways
Status quo bias and the endowment effect are systematic errors in human thinking that can lead, especially when combined, to resistance to change, often resulting in missed opportunities.
These biases can push us to hold onto familiar choices, even if they're less effective or outdated.
Understanding and challenging these biases helps open doors to new possibilities, especially in the growing field of digital finance.
Ever wonder why we stick with familiar choices, even when better ones are readily available? Welcome to another installment in our series on the science behind crypto misconceptions, where we explore how 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 team up to strengthen our aversion to change. Whether it’s sticking with familiar routes or hesitating to try digital assets, these biases reveal why letting go of the familiar can be so challenging. However, awareness and understanding may lead to better choices and results.
The Science Behind Our Stubbornness: A Double Barrier to Change
Status quo bias refers to the preference for the familiar, which causes people to stick with what they already have rather than trying something new. Psychologists believe this bias comes from a deep-seated desire for security and predictability — when something feels familiar, it often feels “safer.”
Take someone who takes the same route to work each day. Even though they know of a new shortcut that could shave off a few minutes from their journey, they may avoid it because they’re already used to their current route. Since they know the familiar path well, they may stick with it even at the expense of time.
Meanwhile, the endowment effect, quite a similar phenomenon, causes people to overvalue things simply because they own them or are invested in them in any way, regardless of the item’s objective worth. This effect becomes even stronger when significant time or resources have been invested, making it harder to let go, even when a replacement would be more practical.
Imagine someone who owns an old car that requires frequent, costly repairs. Each repair strengthens their attachment, as they feel the time and money spent must add to the car’s worth. The time, effort, and money they've put into keeping it running make it seem more worthwhile to keep, even though, from a financial perspective, it’s a poor investment. The car’s market value continues to drop, and the frequent repairs cost more over time than investing in a newer, more reliable model would. This ongoing cycle makes it harder for the owner to recognize that holding onto the car isn’t truly cost-effective.
Together, status quo bias and the endowment effect can create a powerful resistance to change. The familiarity of the status quo provides comfort, while the endowment effect inflates the perceived value of past choices.
Cash is King?
The belief that "cash is king" often stems from the combined influence of the endowment effect and status quo bias, which make physical money feel like the most secure option. For those who have relied on cash throughout their lives, the familiarity of physical currency elevates its perceived reliability. This attachment isn’t about any objective advantages; rather, the endowment effect amplifies the value of cash simply because it’s a known and trusted asset.
Status quo bias can further deepen these attitudes and behaviors, causing newer digital payment options like QR code transactions and instant bank transfers to seem unnecessarily risky or complex. While cash has long been the default, many countries are embracing digital payments so completely that clinging to cash has become both inconvenient and impractical. In Sweden, for example, most establishments no longer accept cash, except in exact change. China has seen a similar shift, with QR code payments now standard in everything from supermarkets to small street stalls, where cash transactions are becoming increasingly rare.
This "cash is king" mentality, while still viable in some cash-centric regions, can hinder one from seeing the conveniences digital payments provide such as ease of use and heightened security features. Status quo bias and the endowment effect keep people clinging to cash even when it’s impractical, making them overlook the disadvantages. As more economies adopt fully digital money systems, this attachment to cash can lead to missed benefits and greater inconvenience. Therefore, recognizing these biases can help people better adapt to evolving financial systems and embrace more efficient, modern payment options.
“Crypto Can Never Serve as ‘Real’ Financial Infrastructure”
Similarly, status quo bias strongly influences how people view financial systems overall. Traditional institutions like banks and credit services have deep roots in society, making them feel inherently reliable and difficult to replace. Adding to this, the endowment effect leads people to value these familiar systems more just because they’ve relied on them for so long. As a result, many view newer alternatives like cryptocurrency with skepticism, dismissing them as too experimental to be viable.
Furthermore, the attachment to traditional finance systems makes it harder for one to recognize crypto’s benefits. Together, these two biases reinforce the view that crypto can never serve as ‘real’ financial infrastructure. Contrary to this belief, cryptocurrencies can offer significant advantages that position them as a viable financial infrastructure, including faster transaction speeds, decentralized control, and increased access for individuals excluded from traditional banking services.
One promising application of cryptocurrency is providing financial services to the unbanked. In regions where traditional banking systems are inaccessible, costly, or ineffective, cryptocurrency can be a revolutionary alternative, creating meaningful change in ways that traditional finance has not.
By providing secure, accessible services, cryptocurrency has become a vital tool for economic resilience where standard financial systems fall short.
“Cryptocurrencies Are Not Real Assets and Can’t Hold Value Like Traditional Assets”
For many people, the belief that cryptocurrencies are not “real” assets and, therefore, lack value can be reinforced by both the status quo bias and the endowment effect. Traditional banks and credit services feel familiar and deeply rooted, making them seem unquestionably reliable, while newer options like cryptocurrency feel risky and experimental by comparison. Adding to this, the endowment effect leads people to value these familiar systems more just because they’ve relied on them for so long. However, value is subjective. Just because traditional assets feel secure doesn’t mean they’re inherently superior.
Yet, if traditional assets were truly unmatched, why do so many young people embrace cryptocurrency as a viable alternative? Recent data reveals that crypto owners skew younger, with 34% in the 25-34 range and 20% aged 18-24, often drawn to digital assets for their innovative appeal and distinct financial benefits. While older generations may see traditional banks and investments as inherently reliable because there hasn’t been an alternative until very recently, younger people may be less likely to share this mindset. With fewer years invested in conventional financial systems, they’re naturally less attached to traditional assets like stocks or bonds and more open to newer options. Status quo bias, which drives people to prefer the familiar, is weaker here as these younger investors haven’t had time to become as deeply rooted in established financial practices. Likewise, the endowment effect — where people overvalue what they already own tend to play a smaller role, as younger investors haven’t accumulated significant wealth in traditional assets.
As a result, younger people are in a better position to view cryptocurrency with fresh eyes, perceiving its potential benefits without the same attachment to traditional systems. This broad interest among younger, tech-savvy users signals a shift: crypto’s value as a modern asset class is gaining ground, especially for those willing to look beyond traditional systems.
Final Thoughts
Status quo bias and the endowment effect can have a powerful influence on how we perceive value, steering us toward what’s familiar while holding us back from trying potentially rewarding alternatives. In finance, these biases reinforce attachment to traditional assets, sometimes making newer options like digital assets feel overly risky or experimental. However, as we’ve seen, embracing emerging technologies like cryptocurrency can offer financial advantages that traditional systems may overlook.
While change can be intimidating, understanding these biases helps us navigate a rapidly evolving financial landscape with a more balanced perspective. That’s where resources like Binance Academy come in, helping to counter these mental traps with quality information. Found this piece helpful? Stick around for the next piece in our Science Behind Crypto Misconceptions series!
Further Reading
Busting the Crypto Boogeyman: Why The Value of Digital Assets is Real
Science Behind Crypto Misconceptions: The Anchoring Effect
A Portrait of the Crypto Owner: What Do We Know about Web3’s Early Majority