Yahoo Finance Why the concept of 'loss aversion' could help explain Biden's weak economic numbers
The US economy has been throwing off good economic signals for months now, including a steady decline in inflation. Yet Americans' dour mood hasn't budged, and President Biden's economic ratings are still in the cellar.
Why? Observers and West Wing strategists are still trying to figure that out.
Perhaps at least one part of the answer to the rock-bottom consumer confidence — says at least one academic — is a psychological concept known as "loss aversion."
Loss aversion is a cognitive bias that seeks to explain why people consider losses to be more significant than an equivalent gain. In the financial world, this term is used to explain why investors tend to remember losing a dollar much more clearly than gaining it back.
This concept has important implications for how Americans responded to a run-up in inflation during the early years of Biden's term, says Francesco D'Acunto, a Georgetown University finance professor who studies how people process economic news.
He contends the spike in prices for everything from eggs to gas is now seared in the minds of Americans — even as inflation continues to moderate.
"We definitely find in our research that there is a dramatic asymmetry in the reaction," he said in a recent interview, tying the phenomenon to the larger research on loss aversion.
D'Acunto’s research spans years and used a mix of existing consumer sentiment data alongside original surveys designed with market research company Nielsen. His co-authors include Michael Weber of Chicago Booth, Yuriy Gorodnichenko of the University of California, and Olivier Coibion at the University of Texas.
"Even as we now have seen inflation actually going down quite dramatically and being almost back to pre-pandemic levels, people are much slower to adapt their views and beliefs," D'Acunto added.
Where 'loss aversion' came from
The concept of loss aversion was coined all the way back in 1979 by Israeli psychologists Amos Tversky and Daniel Kahneman. In a 1992 followup paper, they published research suggesting that losses are psychologically twice as powerful as gains.
A famous loss-aversion experiment is to offer a subject two options: They can either either receive something like $30 in guaranteed money — or a coin flip where they can receive either $100 or $0 depending on the outcome.
Participants tend towards the $30 because of, as the hypothesis goes, the outsized fear of losing out completely.
Professor D'Acunto says loss aversion principles have also been evident in how people process economic news for years now, even in previous economic eras when the focus was on issues like jobs and wages.
"We find before the high inflation times, people's sensitivity to changes in unemployment rates and wage growth information was kind of similar to their sensitivity to inflation right now," D'Acunto says, adding that inflation nonetheless packs a stronger punch because price swings are often more dramatic and quickly felt by consumers.
In any case, recent polls find that inflation is dramatically front and center in voters’ minds, with the interest in the topic remaining high even as prices have slowly returned to normal rates of increase. New data released this week by a Democratic group called Blueprint 2024 reveals a near-total voter focus on inflation — with 64% of voters fixated on inflation versus just 20% focused on wages.
Of course, Americans also have reason to be dissatisfied with aspects of Biden’s inflation record — a fight both the president and Federal Reserve Chair Jerome Powell acknowledge remains unfinished. While more Americans are working and the economy is growing, purchasing power remains down from Biden’s inauguration day in 2021.
What can Biden do about it?
In the end, it’s unclear what action anyone — inside or outside the White House — can take from these insights. Professor D'Acunto recently presented many of his findings to Biden's Council of Economic Advisers with a detailed summary of his findings.
In that presentation, D'Acunto offered a few thoughts to Biden’s team. He noted that voter perceptions tended to change once people actually sat down and thought about their daily spending. They often realized that things were not as stretched as they’d assumed.
It could be exceedingly difficult to prod the wide swath of Americans in a foul mood to take that step — outside of the context of an academic study — between now and Election Day 2024. But Biden's team might try with his 2024 campaign searching for any way they can to move the needle and $1 billion likely at their disposal.
Perhaps the most novel idea to leverage the power of loss aversion came recently from political strategist Paul Begala.
On a recent podcast, the current pundit and former top adviser to Bill Clinton brought up an idea to leverage loss aversion for Biden's benefit and use Americans' dour mood to his advantage.
"How do you get the economic message out in an FU time: I think it’s loss aversion," he told Pod Save America host Dan Pfeiffer.
Begala’s case is that loss aversion can be used in non-inflation contexts to make Americans realize that the results of the 2024 election could mean losses for them in things like abortion rights and Social Security checks.
"The risk of losing all these accomplishments is the way to get credit," Begala said of the message he'd propose from Biden over the coming year.
"I think that’s a different argument than just that I did a good job," he added.
Ben Werschkul is Washington correspondent for Yahoo Finance.
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