Gains, losses, the endowment effect … and ObamaCare

Here’s why repeal & replace is so challenging …

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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

clip_image001

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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.

 

It’s common knowledge (I think) that ObamaCare has never been supported by a majority of people … until recently, a clear majority opposed ObamaCare … but most recently, the gap has narrowed.

aca-approval-2017

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What’s going on?

 

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.

Then, folks could 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 from a couple of years ago (when ObamaCare opposition was most striking) indicated that 35% thought that they were worse off under ObamaCare; only 18% thought that they were 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?

clip_image005

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Said differently, almost twice as many folks thought they were hurt by the law (a loss) as thought that they’d 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 opposed the law … with a very high degree of intensity.

Now, several million folks are worried that they’ll lose their government-provided “free” insurance and subsidies.

Apparently, they didn’t value those benefits when they got them (after all, they were gains) … but now cherish them deeply … since they represent losses.

A case study in the endowment effect and aversion to losses.

Score one for the behavioral psyche guys.

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For more, see yesterday’s post “Amazon, ObamaCare … and the power of free.”

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#HomaFiles

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