## Sen. Schumer awakens to gains, losses, the endowment effect

Last week, Sen. Chuck Schumer caused a stir in Democrat ranks’ by observing that President Barack Obama’s insistence on revamping the healthcare system was, in Schumer’s words, “misguided” and was a major cause of the GOP’s mid-term election romp & stomp.

Schumer is still all for massive healthcare changes.

His observation is strictly political.

His reasoning:

“Democrats were targeting the uninsured, a population that  makes up only about 5 percent of registered voters. Only about one-third of the uninsured are registered or eligible to vote.”  Source

Schumer’s on the right track, but misses a bigger point: When people are forced to give up something they have, they overvalue the loss and try hard to recoup it.

Behavioral theorists have long observed that most people are risk adverse and, due in part to an “endowment effect”, they “value” losses greater than gains.

Endowment Effect: People tend to ascribe a higher value to things that they already own than to comparable things that they don’t own. For example, a car-seller might think his sleek machine is “worth” \$10,000 even though credible appraisers say it’s worth \$7,500. Sometimes the difference is due to information asymmetry (e.g. the owner knows more about the car’s fine points), but usually it’s just a cognitive bias – the Endowment Effect.

The chart below illustrates the gains & losses concept.

• Note that the “value line” is steeper on the losses side of the chart than on the gains side.
• L & G are equivalently sized changes from a current position.
• The gain (G) generates an increase in value equal to X.
• The loss (L) generates a decrease in value that is generally found to be 2 to 3 times an equivalently sized gain

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For example, would you take any of these coin flip gambles?

1. Heads: win \$100; Tails: lose \$100
2. Heads: win \$150; Tails: lose \$100
3. Heads: win \$200; Tails: lose \$100
4. Heads: win \$300; Tails: lose \$100

Most people pass on #1 and #2, but would hop on #3 and #4.

OK, now let’s show how all of this relates to ObamaCare.

Political posturing aside, it’s a simple matter of gains and losses.

Early on, folks were conjecturing what the law might do to them, largely driven by politicians talking points since the law is so complex and ever-changing.

Now, folks can decide based on their actual experiences:

• Have their insurance premiums gone up or down?
• Are they paying more or less out-of-pocket?
• Are more or fewer relevant procedures & drugs covered?
• Have they had to change doctors or hospitals?
• How soon can they get in to see a doctor?

A CNN poll indicates that 35% think that they’re worse off under ObamaCare; only 18% think that they’re better off.

15. From what you know of that legislation, do you think you and your family are, in general, better off, worse off or about the same now that the major provisions of the health care law have taken effect?

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Said differently, almost twice as many folks think they’ve hurt by the law (a loss) as think that they’ve been helped by it (a gain).

And, since people tend to “value” losses 2 to 3 times more than they do gains, it’s a no brainer that they oppose the law … with a very high degree of intensity.

That intensity made itself known in this fall’s elections.

You’re on the right track, Sen. Schumer.… and should have been able to predict it.

#HomaFiles