Public Option, the Opt-out and Status Quo Bias

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Harry Reid is pushing the public option by arguing that states that do not wish to have the option can opt out of the plan as long as they write legislation to do so within a year.  This is a fairly interesting move; but the beauty in the plan stems not from some policy calculation, but from a presumption that psychological and behavioral biases will kick in making the public option the status quo policy and–more likely than not–the incumbent status quo policy.

The basic idea is that within a year, a status quo bias –it is what it sounds like–will develop for most legislators if some acceptably beneficial–electable–policy outcomes begin to creep in.  In such a situation risk aversion and, more importantly loss aversion would compel legislators to not seek redress of the public option through new legislation.

To get the gist of the argument, see this piece in Psychology Today on ways to increase individuals savings in individual 401(k) accounts.  Unless fallacy of composition were at work–one cannot infer that X is true at the collective level from the fact that it is true at the individual level– the argument for the opt-out would apply in a similar way.

Note that if the status quo bias does not work, and states do opt out successfully we are in grave danger of having policy outcomes that differ widely, across states with respect to public health care.

Find a summary of Cass Sunstein and Richard Thaler’s book Nudge

A more theoretical and scholarly piece by Sunstein and Thaler that has some obvious policy prescriptions can be downloaded here.

Those who have JSTOR accounts might do well to download this more scholarly article: Kahneman, D, Jack Knetch and Richard Thaler. (1991) Endowment Effect,  Loss Aversion and Status Quo Bias.  Journal of Economic Perspectives. Vol 5. No.1.

~ by Faheem Haider on October 31, 2009.

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