Name: Kavya Narain & Ishita Gupta

Behavioral Economics
11th November 2017
Status Quo Bias, A Consumer Story

Introduction

Are people displaying a status quo bias post demonetization or are they shifting back to

their original sellers? Our hypothesis is that people have a status quo bias in their household

shopping habits. In this study, we focus on where people buy vegetables and rations from pre and

post demonetization. We take advantage of Demonetization to create a natural experiment to test

for this. In an ordinary scenario it is difficult to judge if people are shopping for vegetables and

rations from certain places because of their status quo bias or because they actually prefer the

method they are currently using. This is because we do not have a counterfactual. We do not

know how many people will switch to an online method of shopping for rations had the status

quo bias not been there. However, we know that people switched to large stores or online

shopping during demonetization temporarily due to a shock in the environment. If there is no

status quo bias, after the shock plays out people should shift back to shopping from local options,

holding constant factors like convenience.

Demonetization marked an important time in the Indian economy, as a barrier on cash in

a cash-run economy was placed. Hence, the market dealt with several problems post

demonetization making it an important political and economic step taken by the government.

Multifarious academics and journalists covered the initiative by looking at the consequences the

producers faced and the effect it had on them. Further, its macroeconomic implications were and

continue to be studied. However, the consumer’s point of view and the behavioral aspects have

not been explored in depth. This is an additional benefit of our study, we also look at
demonetization from the consumer’s point of view and contribute in a small way to the existing

knowledge about its far reaching consequences. The timing of our study has also played to our

advantage as we are seeing the effects a year after the policy was implemented.

We begin by explaining the demonetization policy in detail and defining the status quo

bias. We explain how we designed the survey and the reasons behind the questions included. The

data section, describes the data collected in detail and gives summary statistics. We conducted

the survey in two areas: Greater Kailash Part 1 and Sector 14 in Gurgaon. These two areas were

chosen because of convenience, however, the houses surveyed were randomly picked. Moreover,

these areas have have a market with vegetable vendors, local shops and a large supermarket. The

consumers also live nearby and distance does not affect from where they buy their vegetables

from. Further, we took into account the profession of the family members of the household, their

family size and the person buying the vegetables as it can affect their choice of the producer. We

also surveyed the producers to study how their sales have changed over time. We took into

account any changes the producers might have made to accommodate for demonetization. In the

results section, we analyse the data and see if our hypothesis holds. We find that only a few

people were forced to change their habits because of demonetization. However, everyone who

switched displays a status quo bias. These results are confirmed by the producers. The sales of

local vendors and vegetable seller have gone down by 40-50%, while the sales of supermarkets

have gone up by 10-15%. In addition, some people have also shifted online.

Literature Review

Demonetization is a policy introduced by the prime minister of India, Mr. Narendra Modi

on 8th November 2016. According to the policy, the existing high currency notes of Rs. 500 and
Rs.1000 were to be replaced by new notes. The old notes immediately ceased to be valid. This

drastic step was taken in order to counter black money and fake currency in the economy. In the

following months, the government argued that they had taken this step to move to a cashless

economy and to formalize the economy. Following the announcement, 86% of the currency was

taken from the economy (Rowlatt, 2016). This decision led to cash crunch and for the next few

days, people had to shift to online transactions or use of credit and debit cards.

A year later, consumer spending still appears to be low. Prabhakar Joshi (2016), in his

article “Study on Demonetization and it’s counter-impact on the life of the common man” shows

a 48% fall in consumption post demonetization. This result is based on the answers he received

from a randomly selected group of hundred people. This sentiment is supported by producers as

well. They believe that overall expenditure has fallen and consumers are only spending on

necessities.

On the macroeconomic level, demonetization is being cited as a reason for low growth

rates by multiple economists. India has a large informal economy and 80% of the transactions in

the informal economy are done through cash. Due to this reason, demonetization affected this

sector and massive layoffs took place. Furthermore, the industrial and manufacturing sectors also

took a hit due to demonetization.

There has been extensive research on the change in producer behavior. An increase in

Paytm usage and online shopping has been recorded. However, the consumers behavior has not

been researched. The biases that may have a role in the behavior observed have not been

question. One such bias is the Status Quo Bias, and it is the focus of our paper.

The status quo bias refers to people’s preference for the existing outcome to one that

requires a change in behavior. It was first mentioned in William Samuelson and Richard
Zeckhauser (1988) paper, “Status Quo Bias in Decision Making” . It discusses the influence of

current and previous decisions on future decisions that people take. It is argued that this is done

because there exists an inherent preference for the current state.

The idea of the status quo bias is further developed by Kahneman, Thaler and Knetsch

(1991) in “The Endowment Effect, Loss Aversion, and Status Quo Bias”. They argue that the

status quo bias occurs because of loss aversion. Taking action as opposed to not doing anything

to change a given situation has a lower utility. Take a famous example where there are two

companies. One gives you the option of signing out of a provident fund and the other gives you

the option of signing in. A greater number of people have provident funds in the first scenario. In

another example, a serious reader of the Financial Times is asked to invest in some portfolios

using a large sum of money that they have inherited. They can choose the portfolio, hence, the

risk level. The other group inherits portfolios invested in medium risk and are asked where they

would like to invest the portfolio's. The number of people who choose medium risk is higher in

the second scenario. Through this experiment, it is seen that an option becomes popular when it

is made the Status Quo. Multiple other experiments have replicated this result and are discussed

in this paper. Examples include a survey of California electric power consumers and two states

selling automobile insurance (Kahneman, Thaler & Knetsch, 1991).

For the purpose of our paper, we define status quo bias according to the findings by

Kahneman, Thaler and Knetsch. We look at the people who shifted to other sources for

vegetables and rations post demonetization and check if they reverted to their original method

once cash started flowing in the market. An underlying assumption is that people have shifted to

other means because of an external shock, namely demonetization, and otherwise would have

failed to do so. This should imply that as soon as the effect of the shock wears off, people revert
to the original method. However, as the literature shows, people with the status quo bias will not

revert to their original habits.

SURVEY

i. Designing Survey Questions

We designed two surveys, one each for consumers and producers. This was done to get

data about consumer shopping behavior from the consumers and from the producers. This will

allow us to crosscheck the data across the two groups. In this manner, we control for any bias

producers or consumers might have while talking about the change in behavior after post

demonetization. We needed to conduct the survey in a locality which had local vegetable

vendors, local shops and Supermarkets. Further, they had to be equidistant from the residents.

We conducted the survey in Greater Kailash Part 1 and Sector 14 Gurgaon. These areas were

chosen based on convenience. However, they did satisfy the requirements of our experimental

design.

We asked producers questions regarding changes in sales, payment methods and

strategies adopted by them after demonetization. If their sales were negatively affected, we asked

them where they felt people were going instead. We also asked if there were any particular

products that were driving the change in sales or was it just an overall change in the number of

customers. Within the strategies used by producers, we found out if they offered credit, delivery

and options of modes of payment before and after demonetization. We included credit and

modes of payment as the problem of a cash crunch is averted and delivery increases the

convenience of the particular option.

 We selected surveyors who belonged to the same area as the producers. Further, they

were present in the area pre and post demonetization. We asked the surveyors whom they bought

vegetables and rations from pre and post demonetization. We also checked the payment method

used and if there was any change in this after demonetization. We did this because an individual

using a card even before demonetization will not be affected by this policy. Further, we found

out the source of income for each family. This is because a business owner may earn in cash and

be more affected while a salaried person may get direct transfers to the bank and hence not feel

the effect of demonetization to the same extent. We also checked for actually shopped for

vegetables and rations. The convenience of cash or card may differ depending on if you are

shopping yourself or the household help does the shopping. These questions allowed us to

control for these important variables that may affect the behavior of the consumer.

ii. Conducting the Survey

We targeted two localities: Greater Kailash (GK) in Delhi and Sector 14 in Gurgaon. We

conducted the survey using an interview format. However, we had a questionnaire with us that

we filled out during our conversations. Due to this, conversation was not unstructured and we

had specific options to the questions we asked. However, conversation often deviated from the

questionnaire. This information was not recorded. We had face to face interviews with the

producers and telephonic interviews with the consumers. We chose face to face interviews due to

literacy concerns. Telephonic1 interviews were chosen for convenience.

For producers, we surveyed local vegetable vendors, local shops and supermarkets.

Unfortunately, we could not get primary data from online shopping sites. However, news reports

offered us some insight into their sales. We conducted this survey in the local markets of Greater

                                                                                               
1
 They  were  faster  as  the  formalities  relating  to  entering  houses  were  bypassed.  Additionally,  we  could  
conduct  them  from  campus,  making  it  easier  to  do.  
Kailash Part 1 and Sector 14, Gurgaon. We targeted all the sellers in these markets. Therefore,

we have information about the population of producers. We surveyed consumers from different

blocks in Greater Kailash Part 1 to control for location. This is due to the fact that multiple

blocks shop from the same markets that we surveyed for producers.

DATA

Total Gurgaon Greater Kailash -1

(No. of Observations) (No. of Observations) (No. of Observations)

Vegetable Vendors 11 5 6

Local Shops 10 4 6

Big Stores 3 1 2

Total 24 10 14

We surveyed all the producers in both the localities. We have a total of 24 observations

for producers. A detailed breakup of the data can be seen in Table 1. Big stores stocked rations

and vegetables amongst multiple other items. They also have a larger variety of brands. The local

shops stock vegetables and rations. All the big stores accepted credit and debit cards before

demonetization. They also offered options of delivery. One local shop from Greater Kailash Part

1, accepted credit and debit cards pre demonetization. No vegetable sellers accepted any mode of

payment apart from cash.

Table 1: A Detailed View of the Number of Observations For Producers

 The total producer data from Greater Kailash is more than that from Gurgaon. This is

because in the area selected in Gurgaon, the residents have a single market from which

household shopping is done. However, in Greater Kailash the residents have two equidistant

markets that offer rations and vegetables. Therefore, in Gurgaon we got all the data from a single

market but in Greater Kailash we have got the data from two separate markets.

We conducted telephonic interviews for the consumers. We called people whose numbers

we had in the locality. Further, we got references from these people and called them as well. In

addition, we made a few phone calls using the local directory published by the Residents Welfare

Association of Greater Kailash Part 1. We found that responses on telephonic interviews were

low as many people did not answer our calls. We had a total of 39 observations for consumers. A

detailed break up can be seen in Table 2.

Total Gurgaon Greater Kailash -1

(No. of Observations) (No. of Observations) (No. of Observations)

Behaviour Changed

due to 20 12 7

Demonetization

No Behaviour

Changed due to 19 10 10

Demonetization

Total 39 22 17

Table 2: A Detailed View of the Number of Observations For Consumers

 We received a greater number of responses from Gurgaon. Demonetization affected the

behaviour of 50% of our respondents. In Gurgaon, 54% of the respondents were affected and in

Greater Kailash 44% were affected by the policy. This effectively reduces our sample size to the

50% that were affected by demonetization. We have to check if they switched back to their

original behavior or continued their new shopping habits and methods.

RESULTS

Graph 1

i. Producers

We find that big stores saw a sustained increase in sales post demonetization, while local

shops and vendors saw a decrease in sales. A sustained increase or decrease means that the

change that these shops and vendors felt after demonetization has continued and has not reverted
to normal. The next shock that affected sales was the implementation of the Goods and Services

Tax (GST). This affected the three kinds of sellers negatively. The average increase in sales of

supermarkets is 15%, the average decrease in sales of local shops is 18.5% and the average

decrease in sales for vegetable vendors is 38.5%. These results2 can be seen in Graph 1. This

story supports our hypothesis that people shifted to larger stores that accepted other modes of

payment and then failed to return to the original sellers. The data shows that on an average sales

fell in one sector by 57% and on an average increased by 15% in the other sector. This gap can

be understood as the market share captured by the online options like BigBasket. A co-founder

of BigBasket reported that demonetization has led to a 25-40% increase in sales. Keeping in

mind the gap between the large stores and local options, we estimate that the increase for

BigBasket would have been closer to 40% as compared to 25%. Further, 45% of their sales come

from fruits and vegetables and 35% from rations. This shows that BigBasket is being able to

supply the items being supplied by local shops and vegetable vendors.

Local shops and vegetable vendors used strategies to maintain their customer base at the

time of demonetization. However, many of these strategies did not work in pulling back their

clients. Three out of six local shops in Greater Kailash Part 1 began to accept credit and debit

cards after demonetization. However, they did not see an increase in sales after taking this step.

The big shops and online platforms already accepted cards at the time of demonetization. This is

the quality that attracted consumers to supermarkets and online platforms during demonetization.

In addition, two local shops began a delivery service. One of the shops that began delivering

items also started accepting cards. Despite the added convenience of a fast delivery (due to the

minimal distance between the local shops and the residents) as opposed to a same day delivery

on online platforms and supermarkets, people did not shift back. During demonetization,
                                                                                               
2
 For  detailed  results,  see  Appendix.  
vegetable vendors started allowing for credit. This was done so that even if people did not have

cash to pay them with at a given moment, they can pay them at a later date. This service had no

effect in improving the sales of the vendors. Paytm was adopted by 66% of the Big Stores, 20%

of the local shops and 27% of the vegetable vendors. The reason for this could be that it is easiest

for the big shops to install an application. Local shops may not have done this as they began

accepting cards. Since vendors could not accept cards, it might have seemed necessary to many

of them to offer a cashless option to their buyers.

ii. Consumers

The categories of ration shops are local shops, supermarkets and online platforms. The

categories for vegetable shops are local vendors, local shops, supermarkets and online platforms.

Pre demonetization, 87% of the consumers bought vegetables from the local vendors and 71%

bought rations from the local stores. They hold the majority of the market share even after

demonetization. However, this is because there are multiple alternatives, each holding a fraction

of the market share. In the case of vegetables, a true majority of the people (58%), even after

demonetization buy vegetables from the local vendors. In the case of rations, it is no longer a

true majority as only 38% of the people buy rations from the local shops.

A greater change in consumer behaviour due to demonetization is observed in ration

shopping as opposed to vegetable shopping. The number of people buying rations from local

stores falls from 71% to 38% of the total respondents. However, the number of people buying

vegetables from the local vendor falls from 87% to 58%. The former is a difference of 33%,

while the latter is a difference of 29%. This result could be driven by the fact that people often

have personal relations with the local vegetable vendors. As a result, these lenders may have, as

discussed before, given their consumers options of credit to retain them during demonetization.
 Looking at the data collected from Sector 14, Gurgaon and Greater Kailash Part 1, we

notice that the results are very similar. For vegetables, people shifted equally to online platforms

and big stores. For rations, most people shifted to big stores completely. The remaining made a

shift to online platforms. See Table 3 for a detailed description of this movement. Paytm usage

amongst consumers for vegetable and ration shopping in both the locations is low and did not

change significantly post demonetization.

Table 3: Approximate Percentage increase in the number of people buying from online platforms and supermarkets

in specified areas

Place Gurgaon Delhi Total

Shifted To: Online Big Shops Online Big Shops Online Big Shops

Rations 0 31 6 29.41 2 28

Vegetables 9 9 5 5 6 4

The other factors we looked at that may influence a change in habits did not seem to have

any effect. However, we found that in the households where the help buys the vegetables and

rations, there was no change in behaviour. Whereas, 42% of the people who by vegetables and

rations themselves changed their shopping habits at the time of demonetization. This can be seen

in Table 4. The factors that do not show a pattern are household size, source of income and

frequency of shopping.
 Who Buys the Change in Behaviour
Ration? Total
No Yes

Household Help 6 0 6

Themselves 19 14 33

Total 25 14 39
Table 4: Change in Behaviour in relation to the Shopper

iii. Overall Results

We see that the data we have collected from producers and consumers does not match up

perfectly. In the case of the supermarkets the change in sales estimated by the supervisors is

lower than it should be, as we know the number of consumers who have shifted to these shops.

The decrease in sales cited by the local vegetable vendors seems to be overestimated, as we

know that 29% of the people shifted away from the vendors. A reason for this could be the

implementation of GST. All of these sellers were negatively affected by it, and brought it up in

conversation while we were talking to them. Due to the relative recency of the GST, it is possible

that while self-reporting the sellers were unconsciously letting the effect of GST show up in their

estimates of demonetization. This is called the recency bias. The reason this did not show in the

consumer’s results is because we did not check for expenditure on rations and vegetables. It is

possible that after the GST, people have tighter budgets and so are buying less of everything.

However, this did not affect their choice of location.

We can see that there is a clear status quo bias and hence we reject the null hypothesis

that there is no status quo bias amongst people in grocery shopping habits. This is because all
those who were forced to change their shopping habits have continued with the changed habits

even a year later. No one who changed reverted to his or her original habits.

Conclusion

The main drawback of our survey is the small consumer sample size. Even though a

telephonic interview was more efficient, an actual door to door survey may have gotten more

responses. Further, some of our sample was simply not affected by demonetization. Therefore,

we could not analyse if they have a status quo bias. Random sampling was not done for this

survey. The areas were chosen based on convenience. A few of the consumer respondents were

also chosen on the basis of convenience. Others may have been filtered by those who chose to

answer our calls and talk to us. It is a possibility that there exists some systematic difference

between those who answer our calls and those who don’t. We were unable to control for these

differences.

Despite these shortcomings, we argue that these results are likely valid for Greater

Kailash Part 1 and Sector 14, Gurgaon at the very least. The reason for this is that we have cross

checked the consumer data with the producer data. We know that producers are underestimating

their sales. Further, we do not have a small producer sample. Therefore,we can take the direction

of change from the producer data confidently. We can also conclude that the change was a

sustained one. That is, sales did not keep increasing or decreasing. Post demonetization the sales

remained approximately the same. This is evidence enough that once people switched from one

seller to the other, they did not revert. This shows a status quo bias of the consumers. The result

is strengthened by the consumer data that supports the same. The only ambiguity that remains is

the magnitude of the change. However, even that can be approximately estimated as the average
of the reports from the consumer and producer side. Therefore, we can conclude that the sales of

supermarkets increased by 21.5%, sales of local vendors decreased by 26.25% and the sales of

the vegetable vendors decreased by 33.75%. We can see that demonetization caused people to

shift to large stores from local shops and vendors. This is because large stores offered cashless

methods of transacting. However, after the cash crunch, despite local vendors and shops making

their service more convenient and attractive there was no return to the original sellers. Hence, a

status quo bias came into play and is visible.

 
 Bibliography

Samuelson, W., & Zeckhauser, R. (1988). Status Quo Bias in Decision Making . Journal of Risk

and Uncertainty, 7-59.

Joshi, P. (2017). Study on Demonetization and its Counter-Effect on the Common Man Life.

Journal of Commerce, Economics & Management.

Rowlatt, J. (2016, November 14). Why India wiped out 86% of its cash overnight. From BBC:

http://www.bbc.com/news/world-asia-india-37974423