In the wake the failure of an Obamacare replacement to gain Congressional approval, University of Chicago professor Richard Thaler, a leading expert on behavioral economics, thinks he has the answer. Speaking at the Morningstar ETF Conference in Chicago and later with reporters, Thaler recommends nudging people to make the rational, unemotional choices that he says are not being made relative to healthcare insurance.
When buying health care insurance, Thaler says people choose the expensive option even though it isn't logical, nudging is key
In his 2008 book Nudge: Improving Decisions About Health, Wealth, and Happiness, Thaler, along with coauthor Cass Sunstein, expressed concern over the choices people make. Due to inherent bias and emotion, human decisions by a wide variety of demographic and educational levels have resulted in “embarrassing blunders. These are reflected in major decisions relative to education, personal finance, health care, mortgages and credit cards, happiness, “and even the planet itself."
Thaler, who called traditional economists “precisely wrong” Thursday, said the notion that people will make rational, well-thought out intelligent decisions is wrong. Humans are messy and don't always act logically.
Poor decision making isn’t limited to the uneducated or poor. In the speech to a group of financial planners, Thaler told the story of professors making health insurance choices at the University of Chicago, pointing to a bias to get “the best coverage” while not recognizing the cost / benefit analysis.
He says most people would be better off with a high deductible and putting money in a health savings account – which provides benefits to those insured when they don’t use health care coverage. Doing the math, this makes the most sense for a large majority of people, but the decision is usually centered on the notion of obtaining the “best coverage.” Best coverage often means a low deductible with a wide array of coverage most people will never use, but this is the choice because it is perceived as “best.”
“It’s like having a choice between two Starbucks coffee shops and selecting the one where the same basic coffee costs 20% more,” he quipped.
Buying health insurance should be as easy as buying a book on Amazon, and Selena Gomez should explain it
When Thaler reviews potential health care replacement systems to determine the most successful approach, he looks at his co-star, Selena Gomez, in a bit part from the movie “The Big Short” for inspiration. Keep the program simple and make sure the nudging or proper incentives are in place.
“Buying healthcare insurance should be no more complicated than buying a book on Amazon,” he told reporters after the speech. “In fact, maybe Jeff Bezos should be hired to develop the website.”
Despite the implication of the word nudging, Thaler doesn’t believe in forcing choices upon people, such as mandating they take part in the insurance marketplace, but rather would like to encourage people to make these decisions on their own. He advocates an automatic enrollment system where users would need to opt-out – a decision which has a cost. Once a user opts-out of healthcare, they should not be able to re-enter the program for two years.
He supports nudging to single payer public option, where a source provides basic health insurance, and believes in an employer mandate to provide insurance. He also advocates that insurance costs in a public option are determined, in part, based on income and ability to pay, the information he thinks the government should assess in real time, not on a backward looking basis.
“The problem is getting the poor insured,” he said. Corporations increasingly don't provide benefits for low-skill workers by outsourcing non-essential tasks to firms that don’t provide benefits, a recent New York Times article noted.
These are the nudging puzzles of the world that Thaler looks at with a behavioral mind that recognizes the illogical. And as for explaining bitcoin, Thaler said he “needs Selena Gomez to explain that,” as even his strain of economic thinking can’t explain the logic.