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Jennifer Ketcham

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Loss-Aversion: From Lindsay to the Deficit

Posted: 09/20/2012 3:52 pm

Wikipedia cites loss-aversion as referring to "people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains." From the Nobel Prize winning-mind of Daniel Kahneman and his good buddy Amos Tversky, loss aversion is part of a larger economic theory called Prospect Theory, where people are more willing to take risks in their decision making when the outcome involves loss rather than gain. The reason I've morphed into a super, geeked-out behavioral economics groupie is because this theory is finally getting the media attention it so deserves. Though I'm going to break it down into mega-simplified terms, I think you'll see how great this ground-breaking theory is and just how much we can implement it into our institutions, rules and everyday life.

The Chicago teachers strike has ended and because Huffington Post journalists and a multitude of other incredible reporters have covered this topic, I'm going to move right past it and into what I think we can really learn from the situation: We can use Kahneman's loss-aversion and Prospect Theory for more awesome things than just settling teacher's union/Rahm Emanuel disagreements. As an overview, here is the most basic interpretation of the union/Emanuel deal. Teachers get bonuses up-front, and if the student test scores don't show the improvement that has been agreed upon in the contract, teachers must return bonuses. Sweet.

Here are some areas in life where I think this kind-of-awesome contractual agreement could be implemented, and I encourage you to come up with some of your own.

We could give Lindsay Lohan her freedom, and if she hits somebody with a car, she has to give her freedom back. Okay, you're right, that will never work. LiLo (as much as I wish and pray that she could get out of the tabloids and the troubled life she seems to live) won't take the court's judgments seriously because as time has proved, she is pretty much above the law.

Let me try something different and less bitchy.

Give me a fantastic and forever perfect body and if I don't use it to keep my significant other "in-the-bedroom" happy, maintain healthy eating habits/workout regiment, and encourage those around me to also have fantastic and forever perfect bodies, I will give it back and reclaim my totally human form, pudge, cellulite and all.

Okay, that one was a little bit wonky (and borderline sexist), but let's try another.

Give me Free College Funds and if I don't earn a degree in five years (to account of the class shortages) and become part of the work force (in some capacity, even if it's changing oil at Jiffi Lube), then I must pay back the loans plus super high interest. This repaying of funds plus interest will be reinvested into the Free College Funds program and encourage parents of "Generation Me" to insist that if their kids live at home, they must be gainfully employed. Additionally, the Free College Funds program will encourage students to finish, because there may be nothing better on earth than a free education.

Perhaps we could use the theory to reframe the unemployment/99 weeks issue?

If I am unemployed and can't find a job that pays -- at least -- what I am earning from unemployment in 26 weeks, then the only way I can continue receiving unemployment up to 99 weeks is if I agree to pay it all back once I find that dream job I know I deserve. Yes, this sounds and is insensitive.

We could give people houses, and if they can't figure out how to pay for them, then they have to give the house back. Oh wait. That already happened. And that was just as insensitive as the unemployment one.

We can also apply it to those people who don't care to pay taxes, as well as those who do! We can give Americans an entire paycheck and if they don't pay their taxes, then they will have to give the entire paycheck back. I heard it's something like 47 percent of the country that could be contributing his and her entire paycheck right back into the economy! Think of the good that could do our deficit.

We could use it with politicians too. We could give them their entire year of paychecks up-front, and if they don't figure out how to balance a budget, or get a state out of debt, then they have to give the entire paycheck back. Actually, I might be onto something here.

The truth is, discarding my tongue-in-cheek assessment of where this can utilized, as a nation we can absolutely use loss-aversion and Prospect Theory in our daily, social and political lives. Maybe it's time we all become behavioral economics groupies.

 

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