Monday, March 17, 2008

Loss Aversion and the expensive placebo

One of the cognitive underpinnings of maximizing (see previous post) is "loss aversion." Basically, it means that we maximizers get buyers remorse, always wondering about the "one that got away." We don't necessarily search for the best answer because we enjoy the process or because we really need the best option. The whole definition of satisficing is that the selected option is good enough. But we experience significant negative affect if we later see a better option out there, or even suspect that there is one.

Which is why I am not at all surprised by the recent study that found that expensive placebos work better than cheap ones. Basically, when participants were told that a placebo pretending to be a pain killer cost $2.50, it worked better than one that they were told cost 10 cents. Of course, both were identical sugar pills. How is this related, you may ask? Well, it is the loss aversion experienced by us maximizers (this is my interpretation, not the study authors). If you spend $2.50 on the pill, it better work. The negative affect that we feel for having made a $2.50 mistake is much bigger than what we feel from a 10 cent mistake. So the top down processes that make placebos work in general are stronger for the expensive placebo because of the greater fear of having made a mistake.

Which also explains Eliot Spitzer's call girl scandal. When I first heard that the escorts cost up to $5500 per HOUR, I could not imagine how they could be worth this much (not that I have much experience with call girls of course). But I bet it is the same as the expensive placebo. When you spend that much, the loss aversion kicks in and your brain makes sure that you enjoy the experience five times more than that $1100 per hour girl.

This also explains my fondness for self-deception. Life is great when you go around taking placebos all the time and feel great 24/7. And if you can further convince yourself that the 10 cent pill is the expensive version, then it is even better.

Mazimizers and satisficers

I topic I have long been very interested in, perhaps because of my own decision making struggles, is the satisficer/maximizer continuum that is so well described in Barry Schwartz book the Paradox of Choice. The basic concept is that there are two 'personalities' (my word, not his) for making choice decisions. In the satisficing strategy you choose an option that is good enough to satisfy your needs, and don't worry about whether there is another option out there that might be even better. The maximizer is willing to put in the extra effort to find the best option, even after a satisfactory option is found.

Part of this of course hinges on the availability of information. If you are buying a breakfast cereal, you can easily get the price, look at the nutrition label to get the grams of fat, protein, and fiber, the levels of each vitamin, and you probably have a sense of the taste from experience or advertising. So it is easy to compare 100 different options and pick the best one if you are willing to spend the time.

But for something like health care, it is impossible to know which doctor is better or even what they will charge when you go for a visit. I switched to a high deductible health plan with a health savings account (the new "free market solution" to the health care crisis) so I have tried to do this for the past two years. I go online to find a doctor, and I find no way to compare them. I call doctors' offices ahead of time and ask what the charge will be, but they can't tell me because it depends on the diagnosis and treatment, which they don't know until I get there (and have already committed to paying). So I am forced to satisfice, even though it drives me crazy (this is why I call it a decision making 'personality'). And I no longer believe this is the free market solution we were looking for.