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?
- Heads: win $100; Tails: lose $100
- Heads: win $150; Tails: lose $100
- Heads: win $200; Tails: lose $100
- 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.
The Homa Files 