Americans may not yet love soccer, but they hate losing.
And, boy, is it harder to think of a more painful defeat thanSunday’s collapse by the U.S. Men’s Team at the hands (and feet) of Portugal. It was a heart-breaking, gut-wrenching, hyperbole-provoking debacle—enough to leave even the casual fan grieving like a kid who dropped his ice cream cone.
Only, we didn’t lose. It just felt like it.
Understanding why we feel deflated won’t give us an automatic berth in the Round of 16. But recognizing the outsized influences thatperceived deficits exert on our behavior can help us make better anti-poverty policy.
What Does Soccer Have To Do with Poverty?
On paper, the outcome should have left fans quite satisfied. Two weeks ago, a win versus Ghana and a tie with Portugal would have provoked an enthusiastic fist-pump. Heck, as late as 64 minutes into the Sunday’s game—when Jermaine Jones artfully arced a powerful curve into the corner of the net to even the score at 1-1—we’d have been thrilled with a tie. And as disappointing as the eventual draw was, our odds of advancing actually increased.
So what explains our visceral disgust with an outcome that should have given us cause for celebration?
You could begin by blaming Clint Dempsey, whose go-ahead goal gave us a 2-1 lead. Dempsey got our hopes up, only to have them crushed when Cristiano Ronaldo capitalized on an American flub in the final minute, crossing a perfect ball to the diving Silvestre Varela, who sent the ball into the net and the United States into an expletive-laced silence.
Maybe the only person smiling in America wasDaniel Kahneman.
Kahneman knows a lot about human behavior, particularly regarding the feeling of loss. Our 2-2 “loss” to Portugal, painful as it might have been, actually tells us quite a bit about how we make decisions.
A Cruel Demonstration of Loss Aversion
The U.S. team’s unfortunate ending was a poignant—almost cartoonish—illustration of loss aversion, a predictable element of human psychology (the identification of which won Kahneman the Nobel Prize).
Loss aversion is a central element of the model of decision making Kahneman developed with the late Amos Tversky, known asprospect theory. According to prospect theory, absolute, objective characteristics don’t matter much when we evaluate a situation. Instead, our preferences and perceptions are evaluated as gains and losses relative to subjective reference points. Often, this reference point is the status quo, but sometimes it can be our expectations.
Humans do not respond to losses and gains symmetrically. We dread losses a lot more than we appreciate gains. It’s part of our evolutionary legacy: we’re hardwired to respond faster, and more forcefully, to threats than we do to opportunities. Avoiding an encroaching tiger is more important than stopping to smell the roses.
Imagine it’s your birthday. Your friend Joe, who loves going to the casino, offers you a choice of a gift: either he’ll give you $90 or he’ll let you spin a ten-slot wheel. Nine of the slots have a gift of $100, but one has gift of $0. Which do you pick? [Author’s note: Much of the information in this piece borrows from Kahneman’s 2011 opusThinking Fast and Slow. It’s a great read.]
From the standpoint of probability, the expected payoff of both options are the same: $90. But if you are anything like most people, you’ll take the guaranteed $90.
Economists would explain your behavior in terms of diminishing marginal returns, which simply means that each extra dollar you get means a little bit less to you. Going from $10 to $20 is a big deal, but going from $1,000 to $1,010 is not. To you, a sure $90 is preferable to an uncertain $100. In other words, when you’re dealing with gains, you’re risk averse.
Now imagine the shoe is on the other foot. It’s Joe’s birthday. Do you write him a $90 check, or do give him a spin on the birthday wheel?
In this scenario, you’d likely prefer to give Joe the gamble. In your mind, the prospect of having to spend an extra $10 on Joe’s birthday—$100 versus $90—is well worth the 10 percent chance of not having to spend anything. Now that you’re facing a loss, you’re risk-seeking.
Our Daily Wheel of Fortune
Prospect theory—and risk aversion in particular—explains how we act in a surprising diversity of situations. For example, investors often hold on to losing stocks far longer than they should. The psychological cost of realizing a loss outweighs the financial cost of foregone earnings in a more profitable investment. Homeowners, too, fall prey to the sunk cost fallacy: because of the time and money they have invested in their houses, they are reluctant to sell, even in the face of financial calamity.
Lest you think loss averse behavior is limited to investment strategies, think again. Many people express dissatisfaction with their jobs, yet relatively few quit. Mind-numbing spreadsheets and obnoxious bosses are somehow preferable to the unknowns of the job market. And we don’t like admitting defeat.
Indeed, loss aversion permeates much of our behavior—a fact that becomes clear when we consider a related concept, the “endowment effect.” Popularized by Richard Thaler, he ofNudge fame, the endowment effect describes people’s propensity to value something more merely because they possess it.
In acreative study, Princeton economist Alan Krueger provides a compelling example of the power of endowment. Among football fans who paid $325–$400 for Super Bowl tickets, more than nine in ten were unwilling to re-sell them for $3,000—despite the fact that they spent nowhere near that amount to acquire them in the first place. The simple act of possessing the tickets inflated their value to nearly absurd proportions.
Loss Aversion as a Lens
So, we’re captive to psychological biases of which we’re usually not even aware. Fortunately, there is a silver lining: understanding these behavioral predilections can help us make better policy.
Consider contract disputes. States and localities frequently have to renegotiate deals with various unions. The outcomes can have major consequences for both worker well-being and long-term budget balance. Because of loss aversion, workers will fight tooth and nail to avoid even the smallest cut in pay or benefits. Similarly, mayors and governors are reluctant to make concessions that will imperil other policy priorities.
Often, the key to breaking the stalemate is a subtle reframing: proposing annual salary increases of, say, 2 percent rather than the conventional 4 percent. By changing the frame from an outright loss to a slower rate of gain, such a proposal is likely to meet less resistance.
Loss aversion can also help explain why peoplepurchase insurance—or fail to. People who perceive the chances of getting sick as small will see premiums as a loss, and avoid them. Living with the distant potential of a large loss (getting sick) is preferable to a smaller loss that is guaranteed (the premium). By contrast, if the financial ruin of catastrophic illness is made salient, the frame shifts from losses to gains. With bankruptcy as the reference point, insurance suddenly seems like a bargain.
Better Anti-Poverty Policy
Closer to my own heart, prospect theory can help us rethink poverty policy. As Kahneman points out, the poor are, by definition, constantly operating in the domain of losses: they have less than they desire. As such, they may be doing more risk-taking than traditional economic theory would suppose. The circumstances of scarcity may explain, for instance, why the poor are more likely to play the lottery, despite its clear financial illogic.
Similarly, prospect theory can point to why, despite constant threat of sanctions,work participation rates among welfare recipients remain stubbornly low. Because the poor are short on both time and money, it may make a lot of sense of shirk job requirements and risk getting caught, especially if the payoffs—more time with family or off-the-books earnings—are tangible and the penalty is the possible loss of a welfare check that was inadequate to begin with.
But there’s more to prospect theory than identifying problems. It also shows us how to fix the safety net: by turning gains into losses. For instance, instead of monthly checks, welfare recipients could be given upfront lump sums—say, six months of benefits at a time. These funds would be deposited in bank accounts held jointly with the administering agency and subject to monthly withdrawal limitations. Now, rather than get a new check each month for continued good behavior, funds would be deducted for noncompliance. Framed as a loss, shirking would feel worse to recipients, creating added incentive to comply. (To my knowledge, no experiment has tested this hypothesis, but the conclusions do follow logically from the theory.)
Better still, loss aversion provides a compelling rationale tostreamline the safety net’s front-end. It is well-known that many eligible familiesfail to apply for benefits for which they qualify, resulting in unnecessary suffering, especially among children. Often, the reason is a labyrinthine application process whose dizzying complexity is matched only by scornful antagonism. Quite rationally, prospective beneficiaries decide it is not worth it to endure these indignities for small, uncertain payoffs; and in any case they don’t have the time. As economists would put it, the certainty of opportunity costs—temporal and psychological—outweigh foregone gains that seem small and are hardly guaranteed.
By contrast, if the process were made simpler and more humane—that is, if entitlements actually were entitlements—the script would be flipped. Low hassle and a higher chance of application approval would shift the reference point to the expectation of benefit receipt. From this perspective, failing to apply would be construed as a loss rather than a foregone gain. And because, as we have seen, people are risk-preferring in the domain of losses, prospective applicants would be more likely to take the shot and apply. A brief trip to the local social service office would be a small price to pay to avoid the disquietude of squandering your family’s chance of living more comfortably.
The great thing about prospect theory is that once you understand why people act as they do, implementing powerful reforms is often simple and virtually costless. Mostly, it’s about subtly reframing how a situation is presented rather than changing its substance.
Of course, separating perceptions from reality can be challenging. Which is why—whether in soccer or in policy—we must remember not to allow our tendency to keep score to block the goal.
Photo credit: Getty