A local gas station is a reminder of the power of prospect theory and offers a lesson for health care reformers. The station offers a 5% discount for paying in cash. This could, of course, have been a 5% markup for paying with a credit card. The gas costs the same either way, only the description changes.
A key element of prospect theory (the basis for behavioral economics) is that people treat gains and losses differently – as the folks who wrote the description at the link above put it, “Under prospect theory, value is assigned to gains and losses rather than to final assets…” I would rather gain 5% than lose 5%, even if the gain and loss wind up at the same number.
Many of the decisions we make everyday are rooted in these calculations – how and when we use grocery store coupons, how we deal with things like insurance, if and when we buy lottery tickets, and so forth.
One area in which we weigh the probabilities of gains and losses is health care. If we were strictly rational actors we would carefully weigh all of our options, examine the probabilities, and act based on that analysis. But we’re not strictly rational actors, we’re bears of little brains who act sort of rationally (we’re “boundedly rational” in the hipster jargon of these things).
If health care reform is seen as giving us things for behaving well, rather than punishing us for behaving poorly (a discount rather than a markup) we are likely to be more supportive of the plan. For example imagine there is a baseline health care plan to which everyone is entitled, and adjustments to fees are made based on personal habits such as smoking and drinking. One way to present the plan would be to say: “Everyone pays $100. If you smoke, you pay an extra $10, if you drink you pay an extra $10, if you don’t exercise you pay an extra $10.” Another way to put it would be “Everyone pays $130. If you exercise, you get a $10 discount. If you don’t drink you get a $10 discount. If you don’t smoke you get a $10 discount.” Either way, the base is $100 and extra risk factors increase the cost by $10 each. But one talks about gains (discounts) and the other losses (fees) and thus are different.
This example is obviously oversimplified, and getting consensus on health care isn’t just a matter of playing tricks with words. But as policymakers and advocates make their case in the coming months, they would do well to remember that the gas station you get a discount for cash, but aren’t charged extra for credit.
