Loss aversion in action

A true story for today

April 6, 2017

A few weeks ago, while reading The New York Times (Sunday, March 24, 2017), I read an article by Robert H. Frank. Mr. Frank who offered a fascinating interpretation about the root cause of the Republicans’ manifest failure to repeal and replace the Affordable Care Act (Obamacare). What follows is a brief summary of his report.

The U.S. Republican party have been promising to repeal Obamacare for seven years, and having won control of the White House and Congress, they had to try to deliver. But while their bitter denunciations of the Affordable Care Act may have depressed its approval numbers, they didn’t make replacing it any easier.

On the contrary, the repeal-and-replace bill drew withering criticism from the left and the right. Liberals condemned its use of reductions in health coverage for the poor to pay for large tax cuts for the wealthy, while conservatives bemoaned its retention of many subsidies adopted under Obamacare.

Loss aversion is real

In the end, the repeal effort’s biggest hurdle may have been loss aversion, one of the most robust findings in behavioural [and investment] science. As numerous studies have shown, the pain of losing something you already have is much greater than the pleasure of having gained it in the first place.

Remember, the nonpartisan Congressional Budget Office estimated that the American Health Care Act (A.H.C.A.) would have caused more than 14 million people to lose coverage in the first year alone, with total losses raising to 24 million over the next decade.

Loss aversion works both ways

Many Republicans in Congress were nervous about the political firestorm already provoked by the mere prospect of such losses. Loss aversion actually threatened the repeal effort on two fronts:

  1. Voters’ fear of losing their coverage.
  2. Lawmakers’ fear of losing their seats.

Like the first fear, the second appeared well grounded. Republican voters wouldn’t have been the only ones losing coverage, of course, but early studies suggested that losses would have been concentrated among people who voted for President Trump.

The Congressional Budget Office estimated, for example, that the A.H.C.A. would have caused premiums to rise more than sevenfold in 2026 for 64-year-olds making $26,500.

My take on events

Now that they have withdrawn A.H.C.A. from consideration, attention shifts to what comes next. Perhaps the Republican approach might favour a form of the single-payer health care that most other countries, including Canada, use?

According to Physicians for a National Health Program, a U.S. advocacy group: “Single-payer national health insurance, also known as ‘Medicare for all,’ is a system in which a single public or quasi-public agency organizes health care financing, but the delivery of care remains largely in private hands.”

So there you have it. A monumental piece of health care legislation derailed by the effects of a behavioural syndrome we in the wealth advisory business observe virtually every working day of our professional lives. Fascinating.

Geoff Funke is a Senior Wealth Advisor at ScotiaMcLeod®, a division of Scotia Capital Inc. of Scotia Wealth Management. Tel.: 604.535.4721.