AN INVESTIGATION OF RISK-TAKING, LOSS AVERSION AND STATUS QUO

BIAS IN SINGAPOREAN YOUTHS ACROSS DIFFERENT INCOME LEVELS

LEE SI YUAN M15606

Research Paper in part fulfilment for the NUS High Diploma (Major in
Economics) presented to the Department of Humanities, NUS High School of
Mathematics and Science 2014/2015
 EC6111 Humanities Research Paper – Economics
An investigation of risk-taking, loss aversion and status quo bias in Singaporean
youths across different income levels

ABSTRACT

Despite assumptions of rationality (gain-maximization) in classical economic

theory, people often make less-than-ideal decisions, due to widespread
prevalence of well-documented “irrationalities” like status-quo bias, loss-
aversion and risk-taking. This causes significant deviations from expected
market behaviour. Several parameters affect the incidence of these
irrationalities, but the focus here is on income levels. This survey-based
investigation targeted late-adolescents to young adults aged 17-21 with tertiary
education, separated into different sections to investigate different
irrationalities highlighted. The survey was disseminated physically and through
Google forms. Collated data then underwent chi-square association tests, which
showcased a clear association between Loss & Gain Attitude and income levels,
where all options showcased low probabilities of gaining relatively large
amounts (with overall small net gain). Scenarios entailing slight net loss overall
(mirroring gambling and investment) also warrant further study, using larger
sample sizes with more equal gender-ratios, before making conclusive remarks
about their association with income levels.

LEE SI YUAN M15606

 EC6111 Humanities Research Paper – Economics
An investigation of risk-taking, loss aversion and status quo bias in Singaporean
youths across different income levels

Introduction
Classical economy theory is based on the assumption of economic rationality amongst
individuals, to maximize gain and minimize loss. Theoretically, this should mean that
individuals rarely engage in activities where net losses in the long run are presented,
and have few qualms switching to better alternatives, assuming low transaction costs
or additional time needed. However, this is not the case, due to certain irrationalities
in our decisions made, which have psychological origins.
Three such phenomena will be defined. Loss aversion is when the potential losses
from a decision made looms larger than potential gain of the same value. Even larger
potential gains can be outweighed by the prospects of a small loss. Often, it is the
result of exaggeration of opportunity costs. This means that decisions made do not
maximize one’ economic welfare. Loss aversion is often confounded with risk-taking,
of which it appears to share an inverse relation with. Risk-taking is informally known
as the willingness to make losses, in presence of a greater potential gain. Last but not
least, status quo bias is the unwillingness to move on to more beneficial alternatives,
where little additional time or effort is needed. This need not be economical in nature,
however – the phenomenon is also used to analyse why some political parties remain
in power legitimately for prolonged durations, despite rising discontent with the
government (as seen in Japan, where the Liberal Democratic Party continues to
dominate despite many unpopular decisions made).
Whilst studies have been studied on forms of economic irrationality, much of it focuses
on loss aversion and risk-taking, not so much for status-quo bias. In addition, age and
ethnic group appears to be the main parameters studied. Focusing on income level as
a parameter could benefit government policymakers and marketing agents in
investigating “sticky prices” for certain goods baskets, and identify investment or lottery
schemes which are most attractive to different income groups. In scenarios where
significant loss of welfare was identified, it will then be easier to pinpoint specific forms
of risk-partaking activities to regulate.
Identifying sources of welfare loss is especially important in the lower-income groups.
Since they already earn comparatively little, saving even small amounts of money that
were not well-spent (due to the above forms of irrationality) could go quite a long way
in increasing their living standards.

Evaluative Conclusion
In scenarios presenting net gain (in low possibilities but large amounts) without
possibility of loss, there exists a clear association between Loss & Gain attitude and
Income Group. Income Group D with the highest income overwhelmingly chose the
option with lowest possibility of winning the largest amount. Income Group A with the
lowest income chose the “moderate” option, which increasingly shifted to the option
with highest (though still low) possibility of winning the smallest amount as income
level increased, up to upper-middle income in Group C. This can find application in

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 EC6111 Humanities Research Paper – Economics
An investigation of risk-taking, loss aversion and status quo bias in Singaporean
youths across different income levels

improving promotional offers by companies in non-price competition –

products/services targeted at high-income consumers would find “lottery” offers more
attractive, in contrast to middle-income groups who may prefer spinning a wheel for
prizes. It is worth noting here that there exists no clear association between prize
selected (and its equivalence in money) with income group, which is tested later on in
the “reality-based” status-quo bias test. However, a significant proportion picked the
good (pencils), believing it to have greater value than its equivalence in money despite
being otherwise specified. This irrationality was somewhat alarming.
The possible associations between Risk-Taking Attitude and Income Group should be
further studied with larger sample sizes and more equal gender ratios, before clear
conclusions can be made. For the scenario entailing high chance of small loss but
small chance of large gain (small net loss overall) mirroring a typical lottery, higher
income groups seemed more prone to make losses – though this is typically not of
major concern, in view of their better financial position to make occasional small losses
without compromising material living standards (compared to if this happened in lower-
income groups). The importance in determination of above-mentioned associations
can be attributed to the widespread nature of investment and gambling schemes in
reality, which may cause welfare loss as a whole if not carefully monitored.
Uppermost Income Group D showcased the lowest incidence of status-quo bias in
both economic and non-economic scenarios. This potentially identifies them to have
the highest price-elasticity of demand for products/services, indicating that it may not
be worthwhile in developing forms of non-price competition like brand loyalty to cater
to this income group. They may also constitute a significant proportion of “swing-
voters”, assuming they have little vested interest in any particular group.
Inconsistency of results for non-economic and economic status-quo bias in the other
Income Groups prompted the need for an additional of status-quo bias tests using
items of actual economic value in reality. Results show that lower and lower-middle
income groups A and B exhibit lower status-quo bias when goods are low-cost, but all
3 groups have equally low status-quo bias when the value of the good was significantly
increased.
This may hint at lower price elasticity of consumption for Income Group C with regards
to products/services at low cost, owing to their disregard to differences to small
differences in welfare compared to lower income groups. Where applicable, this can
be exploited in non-price competition, for instance through brand loyalty programs.
This may also hint at greater price elasticity of products/services for lower income
groups, indicating that companies targeting them should engage more extensively in
price competition to increase revenue.