Full Site Articles EconLog EconTalk Books Encyclopedia Guides

# Government Health Insurance and Pseudocertainty

 Krugman Blames Adverse Selecti... Me on KQED-FM...
One of the most appealing arguments for government health insurance is the perception that it's "a sure thing."  No matter how powerful reputational incentives are, a private health insurance might go out of business, or fall into the hands of a myopic CEO.  With government health insurance, on the other hand, you know that you're covered, right?

This is a prime example of what psychologists call a pseudocertainty effect.  Tversky and Kahneman originally explained it using two hypotheticals (my paraphrase):
Hypothetical #1: You play a two-stage game.  There is a 75% chance that the game ends in stage 1 and you win nothing.  However, if you make it to stage 2, you get to choose between \$30 with certainty, or an 80% of \$45.

Hypothetical #2: You choose between a 25% chance of \$30 or a 20% chance of \$45.
Most people take the first choice in Hypothetical #1, and the second choice in Hypothetical #2, even though they are mathematically identical.  T&K's explanation: Hypothetical #1 looks better due to a "pseudocertainty effect."  People are misled by the fact that the P(A|B)=1, even though B itself is far from certain.

What does this have to do with health care?  Well, government health care is a sure thing conditional on (a) getting high-quality care for (b) a treatable ailment (c) in a timely manner (d) without getting a secondary infection... etc.  In other words, like private health care, government health care isn't a sure thing at all.

Now you could object, "It's not about a pseudocertainty effect.  It's about a higher likelihood of good health with government health insurance."  If you go down that route, however, you've opened yourself up to a barrage of tough questions.  What evidence is there that government health insurance raises life expectancy - or any other major measure of health?  Even if it does, is the extra cost worth it?  As Tversky and Kahneman showed, people will pay a lot to go from near-certainty to perfect certainty.  They're far less eager to pay an arm and a leg to go from a 45.3% chance of living to 80 to a 45.5% chance living to 80.

My point: While "certainty" is of the most appealing arguments for government health insurance, it's silly.  But if proponents stop using it, it's going to be a lot harder to win over public opinion.  It's a choice between persuasion and honesty.  Take your pick.

Perhaps I'm misunderstanding the hypothetical, but if the choice in hypothetical 1 comes in stage 2 then the two cases are not mathematically identical (they would be if someone had to choose what he'd do in stage 2 before stage 1, but that's not how the explanation is phrased).

PJens writes:

Choice between persuasion and honesty? That reminds me of the campaign last fall!

gnat writes:

Let's take some real cases: IBM retirement health care benfits (at 65)--gone; IBM defined benefit retirement--gone. One of the obstacles a 40 year old Bryan might have in buying long term healthcare is whether the insurance company that collects monthly premiums for forty-odd years in the future would pay off.

RL writes:

Bryan, you've hit on a major point. I am struck by the number of times when I've discussed this with people the mere fact the government "will always be there" played a key role in their understanding of the argument.

Mike writes:

"even though they are mathematically identical"

No they absolutely are not. Unless you force the person to pick their response for stage 2 in Hypo. 1 before the start of Stage 1.

The way you wrote hypothetical #1, if the person makes it to stage 2, they have new information that did not exist before stage 1 started: the fact that they made it through stage 1.

Maybe you just wrote it wrong. I hope so. I'm not familiar with this argument, but you should make that more clear.

writes:

The reasoning is that government won't deny you the care you need, while a profit-seeking company can.

Despite Bryan's insistence that such fear is silly, a lot of people have a lot of fear about their insurance plans. They don't want to be able to sue; they just want what they bought.

Of course, a government plan must do one of two things:
1. say "no" sometimes
2. run up massive costs

I don't see Congress being adult enough to try #1.

Joshua Sharf writes:

This might also explain the affection that many senior have for Medicare, and the similar affection that veterans and soldiers have for the VA. Granted, the VA isn't the grease fire it was 10 years ago, but it's not the best advertising for timely, up-to-date care.

Joe Cushing writes:

This is interesting. Maybe you hit on a way to fight against this bill

Comments for this entry have been closed