American Consequences - August 2020

By Joel Litman

HOW LOSS AVERSION CAN AFFECT YOUR PROFITS IN THE AT-HOME REVOLUTION

It’s a behavioral concept that’s been around as long as humans... Aristotle said simply that objects are differently valued by those who have them and by those who wish to get them. There’s a psychological inertia behind how people value something more if it’s already theirs than they do if it isn’t. One person may value the bird they hold far more than the two they are likely going to get in exchange, even if that likelihood is near certain. Another related term for this is the ownership effect... And maybe even more to the point of the feeling of not having that endowment anymore is the term “loss aversion.” Loss aversion is the idea that losses have a larger psychological impact than gains of the same size. I like to win, but I hate to lose. Many of our employees here in the U.S. are Red Sox fans. Ask them what they would want back for Mookie Betts before the Red Sox traded him away. Well, there was nothing that the Dodgers, or any other team, could offer that would have left them satisfied. On the other hand, if you know any Dodgers fans, you know they were terrified at the

thought of the Dodgers giving up great youngsters like infielder Gavin Lux or pitcher Dustin May. But if we cut to today, now that we have Betts as the MVP for the Dodgers, would Dodgers fans trade him for anything else? Probably not. They’re suffering from the endowment effect. Similarly, with entitlements, now that citizens have these benefits, they attribute a lot more value to them than they would have if they had never received them in the first place. What is the response of a person receiving Medicare who is told the benefits might go away at any level? The representative or senator is likely to see outrage. The ACA, or the Affordable Care Act, is now seen as one of those entitlements. It’s not quite yet the third rail of politics, but it might be in the future. Many attempts have been made to repeal the ACA. And while small changes have been made, attempts to defund it and declare wide swaths of it to be illegal have not worked. For the time being, it is here to stay. Meanwhile, many estimates show how Social Security’s reserves, under current rules,

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American Consequences

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