Loss aversion, the endowment effect … , and ObamaCare.

President Obama is clearly perplexed on why the dogs aren’t eating the ObamaCare food.

He’s trying to give people a better “product” … and they just don’t get it.

What the heck is going on?

Well, shoving the roll-out snafus aside, much of the answer lies in good old behavioral economics.

 

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Let me explain …

 

In my Advanced Marketing Strategy class, students read “Eager Sellers and Stony Buyers” by one of my favorite academics –  Harvard’s John Gourville.

The article drills down on why most new products fail.

Gourville relates back to some primary behavioral research done by Tverysky & Kahneman on gains, losses, and loss aversion.

Tverysky & Kahneman concluded that:

  1. People evaluate the attractiveness of an alternative based not on its objective, or actual, value but on its subjective, or perceived, value.
  2. Consumers evaluate new products or investments relative to a reference point, usually the products they already own or consume.
  3. People view any improvements relative to this reference point as gains and treat all shortcomings as losses.
  4. Most important, losses have a far greater impact on people than similarly sized gains, a phenomenon that they coined “loss aversion.”

Further T&K concluded that the loss aversion is so great that Losses loom larger than gains” by a factor of between two and three.

Said differently, a new product must be 2 or 3 times better than an old product for a person to switch brands.

Economist Richard Thaler took loss aversion a step further by observing an “endowment effect”

The endowment effect posits that “loss aversion leads people to value products that they already possess — those that are part of their endowment — more than those they don’t have.“

According to Thaler, “consumers value what they own, but may have to give up, much more than they value what they don’t own but could obtain.”

And, researchers have found that the endowment effect intensifies over time … creating a “status quo bias” … a fear of losses that drives a resistance to  to change

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Now, put those well established behavioral biases in the ObamaCare context.

The President repeatedly told people that if they liked their current health insurance and doctors, they could keep them.

That was a profound reassurance to the mass of folks who opt for the status quo and are loss averse.

Then, millions of folks started getting cancellation notices.

No more status quo … just the prospect of enormous perceived losses – higher costs, mismatched coverage, loss of doctors.

Based on behavioral research those perceived losses are perceptually amplified … that is, folks feel betrayed and place a heavy emphasis on their losses.

So, even if ObamaCare is a better offering for them – it has to be at least 3 times better or folks will feel cheated.

In a free market they’d just reject the new product and stick with their trusted plan.

Since they can’t they’re angry … very angry.

Didn’t Obama see that coming?

It’s garden variety behavioral economics.

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