The Republican Party is trying to make the upcoming election turn on the economy. Fox News has been trying to run their news cycle on it. Early in the day, they run stories about how well the economy is doing, then have talk segments about it, followed by later talk segments about how the American public is somehow not able to see how well things are going. The subtext is , “If you were as smart as us, you would get this.” Undoubtedly some people parrot those talking points the next day when talking to friends.
Or not, to quote Jacob Hacker.
In my own research using the Panel Study of Income Dynamics — a survey that has traced a large sample of Americans over time — I’ve found that family incomes have become much more unstable since the 1970s; the gap between our income in a good year and our income in a bad year has expanded. Increasingly, it seems, Americans are living on a financial roller coaster.
Of course, roller coasters go up as well as down, so it’s tempting to think that the net effect of economic instability is a wash. But instability causes hardship even when the “average” experience stays constant. In their seminal 1979 article “Prospect Theory: An Analysis of Decisions Under Risk,” psychologists Daniel Kahneman and Amos Tversky showed that people dislike losing things they already have much more than they like gaining things they don’t have — a phenomenon known as “loss aversion.” As a result, losses in income are psychologically difficult even when followed by equal or even larger gains. And, of course, it’s on those downward trips that people lose their houses, their jobs, their retirement savings and other staples of middle-class life.
Loss aversion is surprisingly strong. In a recent nationwide survey by the polling firm Lake Research Partners, respondents were asked whether they preferred “the stability of knowing your present sources of income are protected” or “opportunity to make money in the future.” By a two-to-one margin, Americans chose stability over opportunity.
This helps explain why Americans are so dissatisfied with the current economy. They see the overall gains, but they don’t think that those gains have translated into greater security for their families, and they’re worried about the risk — whether it be the loss of a job, unexpected medical costs or some other setback. A majority of registered voters say the economy is getting better, according to a Washington Post-ABC News poll last week. But more than three-quarters still say they are either falling behind or just holding steady. The actual or possible erosion of safety nets (such as Social Security, guaranteed pensions and workplace health insurance) only heightens such concerns.
Loss aversion may also help explain the muted public reception to Bush’s “Ownership Society” agenda, which was shelved after his proposal for private Social Security accounts crashed and burned (though, much to the dismay of Republican candidates, Bush recently said he wants to tackle the issue again). According to polls, many voters thought they would do better with private accounts. Yet they intensely feared the risks, such as a stock-market downturn or outliving their savings.
Given how spectacularly wrong politicians have been, people are right to be loss averse.