Why we stick (when we should switch)

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

We’ve all done it; sworn we’d break from our regular restaurant order, only to panic and opt for the ol’ faithful option when the server whips out the pad and pen. That little head gremlin shouting “Are you mad, what if we don’t like it?” can crop up in the coffee shop queue, on the hunt for next year’s holiday or when it comes to choosing our next phone.

There’s nothing wrong with sticking with what we know - the fascinating part is how often we do it despite planning to do the opposite, or without even considering a change at all.

We’ve mentioned before that our brains are cognitive misers, meaning they’ll conserve energy wherever they can, and there’s no better way to do that than to do nothing. That’s why carrying on with the same routine, or choosing the same option as last time feels so appealing. We know what we’re getting, it doesn’t take any effort to understand and, crucially, we can make the decision quickly and easily. Throw in a bit of perceived pressure like a server appearing out of nowhere and the whole table staring, and that desire to get through it all can easily trump whatever plans you had beforehand.

Status quo bias can kick in when we experience loss aversion (what if this doesn’t work out?), decision fatigue (any change from the norm means introducing mental load or effort) and familiar comfort (even if it’s not the best option out there, it’s the one I’m OK with).

There’s an important part to all of this, namely that our brains are trying to make the easiest decision, not the best one. You’d think they’d have our best interest at heart but no. Lazy, really.

You’ll recognise that breaking point - when you lose patience or give up on a task - if you’ve ever tried to compare bank accounts online, find the cheapest flights (ah but that one has more luggage and more time for shopping) or been asked to renew something like travel insurance or a phone contract.

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Sometimes our brains prefer to slam the internal maths jotter closed and go for the option in front of us rather than seeking out the best one. Quite often, companies play on this, letting us slip into renewals with a “Don’t worry, you don’t have to do anything…” email, which kindly re-enrols us. How handy.

That handiness can start to cost us, though. If you’ve ever enquired about a new phone contract and realised you’ve been on a weird tariff for years, or your mortgage has rolled off onto a ‘standard’ rate, you’ll know the feeling.

Brands do their best to make the most of the effect too. Every time you roam the supermarket aisles, companies are hoping their marketing campaigns, free samples and shelf placement are enough to have you reach for their product without even thinking. Is it the best? No idea. Is it the one I recognise and the one right in front of me? Oh yes.

It’s why investors often consider these brands when wider discretionary spending takes a bit of a hit, like when interest rates start to rise. You might cut back on going out to eat but is there really an alternative to your go-to fizzy drink? It can mean brands in that sweetspot (still dominant enough to keep you buying without reconsidering, not quite expensive enough to make you trade down just yet) get more attention from investors for their seemingly sticky revenues and margins despite consumer cost pressures.

That doesn’t mean we’ll keep spending on more expensive brands if inflation rises - we all have a point where it may make sense to look elsewhere - but if we trust a brand’s consistency and ubiquity, our habits are likely already formed around them, making overall sales steadier.

That brings us neatly onto how the heuristic (mental shortcut) can affect us as investors. Having a tendency to stick with the norm means we’re more likely to hoard underperforming assets because they’re familiar, we can rationalise their eventual comeback and we have the feeling that all our research and effort has to be for something (the endowment effect).

The other side of that coin is that we ignore new opportunities because they seem complicated (they may be but is that a reason to not even have a look?) or because we don’t fancy starting from scratch with a new spreadsheet.

It could mean we stick with a default option that we’re put into when it’s not the best place for our money. This doesn’t mean it’s a good thing to toy with accounts like your company pension, rather the point is we can slip into disengaging completely and never checking in on target retirement ages and how much income we’ll need in retirement.

You might recognise yourself in a few of the examples so far but fret not, there’s good news. As with any behavioural bias, the goal isn’t to just tell ourselves to snap out of it - if it was that easy we’d have done it by now - but to can try to mitigate its effect or even turn it into a strength.

Take that stickiness companies love to engender in us, for example. If their business models are successful in building brand loyalty, maintaining margins and keeping customers on board - that consumer inertia could be a sign of stable revenue streams worth looking at.

Then there’s how to manage status quo bias in our own investment approach. The best way to start doing so is to plan for its inevitable appearance, far in advance. We can’t trust ourselves to react rationally in the moment so think about giving yourself clear buy and sell criteria before the pressure situations hit. What would make you sell that stock and how can you automate the decision, through the likes of limit orders, so that you don’t have to rely on your biased self later on? A framework of simple questions could also distill what could be a complicated company into straightforward building blocks:

• What does the company do?
• How does it make money?
• Does it reinvest profits to make even better profits next time?
• Does it have any debt?
• Does its valuation look cheap or reasonable compared to its peer group and its own history?

This isn’t an exhaustive list but the point is hopefully clear that ticking off these questions is an easier starting point than confronting yourself with ledger upon ledger of company reports. Crucially, this way you’re more likely to overcome the internal inertia and keep learning about the firm.

When it comes to our personal finances, if the task of comparing an internet’s worth of insurance quotes or even pension options feels daunting, try only looking at two at a time. It’s the infinite possibilities that can make us shut off, so we decrease the mental load with only two options. You might end up with a favourite that you can compare against another option in a ‘winner stays on’ format. Again, the objective is to overcome that initial hurdle and not introduce too much opportunity for information overload. Breaking bigger decisions like contract renewals into more digestible, binary questions (Have I been happy with the service? Is the customer support good enough?) is a good way to do this too.

There’s also no harm in allowing things like subscriptions you actually use to just keep on rolling. This isn’t a call to interrogate and deny every single payment - sometimes the ease of checking on the renewal price and carrying on is enough to let you focus on other things. Make it work for you.

In the end, we should try to make sure our decisions are guided by doing what’s best for us, not just what’s easiest or quickest. The server will likely be happy to give you a few minutes or answer a few questions about the specials. Even if you go for ol’ faithful again it’ll be an active choice and one you’re much happier with.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.