Responsibility and Loss Aversion

RESPONSIBILITY

Losses are weighted about twice as much as gains in several contexts: choice between gambles, the endowment effect, and reactions to price changes. The loss-aversion coefficient is much higher in some situations. In particular, you may be more loss averse for aspects of your life that are more important than money, such as health. Furthermore, your reluctance to “sell” important endowments increases dramatically when doing so might make you responsible for an awful outcome.

Richard Thaler’s early classic on consumer behavior included a compelling example, slightly modified in the following question:

You have been exposed to a disease which if contracted leads to a quick and painless death within a week. The probability that you have the disease is 1/1,000. There is a vaccine that is effective only before any symptoms appear. What is the maximum you would be willing to pay for the vaccine?

Most people are willing to pay a significant but limited amount. Facing the possibility of death is unpleasant, but the risk is small and it seems unreasonable to ruin yourself to avoid it. Now consider a slight variation:

Volunteers are needed for research on the above disease. All that is required is that you expose yourself to a 1/1,000 chance of contracting the disease. What is the minimum you would ask to be paid in order to volunteer for this program? (You would not be allowed to purchase the vaccine.)

As you might expect, the fee that volunteers set is far higher than the price they were willing to pay for the vaccine. Thaler reported informally that a typical ratio is about 50:1. The extremely high selling price reflects two features of this problem. In the first place, you are not supposed to sell your health; the transaction is not considered legitimate and the reluctance to engage in it is expressed in a higher price. Perhaps most important, you will be responsible for the outcome if it is bad. You know that if you wake up one morning with symptoms indicating that you will soon be dead, you will feel more regret in the second case than in the first, because you could have rejected the idea of selling your health without even stopping to consider the price. You could have stayed with the default option and done nothing, and now this counterfactual will haunt you for the rest of your life.

A survey of parents’ reactions to a potentially hazardous insecticide included a question about willingness to accept increased risk. The respondents were told to imagine that they used an insecticide where the risk of inhalation and child poisoning was 15 per 10,000 bottles. A less expensive insecticide was available, for which the risk rose from 15 to 16 per 10,000 bottles. The parents were asked for the discount that would induce them to switch to the less expensive (and less safe) product. More than two-thirds of the parents in the survey responded that they would not purchase the new product at any price! They were evidently revolted by the very idea of trading the safety of their child for money. The minority who found a discount they could accept demanded an amount that was significantly higher than the amount they were willing to pay for a far larger improvement in the safety of the product.

Anyone can understand and sympathize with the reluctance of parents to trade even a minute increase of risk to their child for money. It is worth noting, however, that this attitude is incoherent and potentially damaging to the safety of those we wish to protect. Even the most loving parents have finite resources of time and money to protect their child (the keeping-my-child-safe mental account has a limited budget), and it seems reasonable to deploy these resources in a way that puts them to best use. Money that could be saved by accepting a minute increase in the risk of harm from a pesticide could certainly be put to better use in reducing the child’s exposure to other harms, perhaps by purchasing a safer car seat or covers for electric sockets. The taboo tradeoff against accepting any increase in risk is not an efficient way to use the safety budget. In fact, the resistance may be motivated by a selfish fear of regret more than by a wish to optimize the child’s safety. The what-if? thought that occurs to any parent who deliberately makes such a trade is an image of the regret and shame he or she would feel in the event the pesticide caused harm.

The intense aversion to trading increased risk for some other advantage plays out on a grand scale in the laws and regulations governing risk. A strict interpretation of the precautionary principle would prohibit any action that might cause harm and put the entire burden of proving safety on those undertaking it. The criticism here concerns that strong interpretation. Precautionary approaches can also hold that uncertainty about potential damage is not sufficient reason to dismiss a risk. As the jurist Cass Sunstein points out, the precautionary principle is costly, and when interpreted strictly it can be paralyzing. He mentions an impressive list of innovations that would not have passed the test, including “airplanes, air conditioning, antibiotics, automobiles, chlorine, the measles vaccine, open-heart surgery, radio, refrigeration, smallpox vaccine, and X-rays.” The strong version of the precautionary principle is obviously untenable. But enhanced loss aversion is embedded in a strong and widely shared moral intuition; it originates in System 1. The dilemma between intensely loss-averse moral attitudes and efficient risk management does not have a simple and compelling solution.

We spend much of our day anticipating, and trying to avoid, the emotional pains we inflict on ourselves. How seriously should we take these intangible outcomes, the self-administered punishments (and occasional rewards) that we experience as we score our lives? Econs are not supposed to have them, and they are costly to Humans. They lead to actions that are detrimental to the wealth of individuals, to the soundness of policy, and to the welfare of society. But the emotions of regret and moral responsibility are real, and the fact that Econs do not have them may not be relevant.

Is it reasonable, in particular, to let your choices be influenced by the anticipation of regret? Susceptibility to regret, like susceptibility to fainting spells, is a fact of life to which one must adjust. If you are an investor, sufficiently rich and cautious at heart, you may be able to afford the luxury of a portfolio that minimizes the expectation of regret even if it does not maximize the accrual of wealth.

You can also take precautions that will inoculate you against regret. Perhaps the most useful is to be explicit about the anticipation of regret. If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are likely to experience less of it. You should also know that regret and hindsight bias will come together, so anything you can do to preclude hindsight is likely to be helpful. My personal hindsight-avoiding policy is to be either very thorough or completely casual when making a decision with long-term consequences. Hindsight is worse when you think a little, just enough to tell yourself later, “I almost made a better choice.”

Daniel Gilbert and his colleagues provocatively claim that people generally anticipate more regret than they will actually experience, because they underestimate the efficacy of the psychological defenses they will deploy—which they label the “psychological immune system.” Their recommendation is that you should not put too much weight on regret; even if you have some, it will hurt less than you now think.