Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

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Actions Have Consequences

I often turned to my father for advice. I would ask him, “What’s the right decision to make?” And he would invariably reply, “There’s no right or wrong. There are only consequences.”

By taking the morality out of the equation, my father forced me to focus not on the action itself, but rather on the outcome of the action: Which action would get me to the best overall outcome?

This taught me that actions have consequences. More than that, though, he taught me that since we choose our actions, we control (to a greater or lesser extent) our outcomes. Since the outcomes we get follow from the actions we take, we should then be led to choose those actions that end up benefitting us.

Situations Can Be Complicated

It can get complicated, though. Suppose we’re given the choice of whether or not to eat a big, gooey, glazed donut. Eating the donut will give us pleasure now as we consume it. However, it will also cause angst the next time we want to wear our tight jeans. Or farther down the road, the donut may be the final straw in causing a heart attack, which will not only be traumatic, but also expensive. What do we do?

The example illustrates how sometimes our actions have outcomes with both positive and negative aspects. In these cases, it is common for the benefit to be immediate and more certain, while the cost is more distant and amorphous. Do we take the action to gain the positive outcome, or do we not take that action to avoid the negative outcome?

If

  1. We just recently enjoyed a different sweet snack that satisfied our sweet tooth for the time being, or
  2. We planned on wearing those jeans on Friday to a party, hoping to impress a certain someone, or
  3. Our doctor warned us that our cholesterol levels are really high,

then we would might very well do what’s in our long-term best interest and forgo the donut. On the other hand, if

  1. Our favorite type of donut was available as a special, temporary offering, or
  2. We don’t see any chance in the near term to wear those tight jeans, or
  3. We know our health insurance will take care of the expenses associated with a heart attack,

then we might very well choose to eat the donut.

Manipulation, Cognitive Bias, and Moral Hazard Exacerbate the Problem

In a perfect world, we would take an action if it led to an overall – that is, net or weighted– positive outcome. In the first set of considerations, A. – C., it sounds like we’re weighting the pros and cons rationally and will take the action that’s in our long-term best interest. Unfortunately, however, we do not live in a perfect world.

  • Others act to influence – manipulate – our decisions to serve their own interests, as in a., or
  • We suffer from cognitive bias: predictable patterns of irrational behavior. [1] In the example, we fall victim to hyperbolic discounting,[1] which leads us to over-weight the clear, tangible, short-term gain relative to the amorphous, larger, but more distant, cost, as in b., or
  • The environment has been changed in a way that creates moral hazard, that is, we no longer bear the full costs of our decisions, [2] as in c.

In this less perfect world, we often end up taking actions that are not, in fact, in our best long-term interests.

It gets worse.

In the cases of manipulation or bias, we often end up worse-off in the long run than we would be if we were rational and immune to manipulation. Hopefully, we eventually learn from the consequences of our actions and do better at resisting actions that are not in our best interests. If not, we’re simply worse-off for not being able to make good decisions.

However, in cases of moral hazard, that is, when we do not bear the full costs of our actions, the effects of our bad actions spillover onto others. In these cases, we underestimate the true costs of bad choices, because we only count the costs we ourselves bear but neglect to include the costs we impose on others. Doing so leads us to take actions that may or may not be in our best-long term interest. However, our actions definitely impose costs on others: the people who bear the portion of costs we’re not responsible for.

Our Healthcare System Is Plagued by These Problems

In the case of healthcare, we increasingly suffer from all three problems previously mentioned: manipulation, cognitive bias, and moral hazard.

Manipulation, much of which plays on our cognitive biases, is coming from multiple directions: Food manufacturers label their products as being “healthy” when they are actually toxic. We’re inundated with advertisements for unhealthy foods. Cheap unhealthy foods are available everywhere – from grocery stores to gas stations to office supply stores. Obesity has become normalized to the point where people are encouraged to accept their unhealthy situations, rather than being encouraged to become healthier.

Cognitive bias is increasingly being invoked as a means of letting ourselves off the hook for succumbing to short-term temptations, rather than forgoing short-term pleasures and doing what’s in our long-term best interest. We engage in hyperbolic discounting, overemphasizing present benefits at the expense of future costs. We jump on the bandwagon or engage in groupthink by joining others who are giving in to temptation. We practice confirmation bias by seeking out information that condones unhealthy behavior while shunning information that warns against it. We fall victim to illusory truth effect and believe that because manufacturers keep telling us sugar-laden yogurt is healthy, it must be so.

Finally, our health insurance system creates moral hazard situations for millions of people. In particular, our system shifts a disproportionate share of healthcare costs from people who are elderly, poor, or sick onto people who are young, rich, or healthy.[3] This cost-shifting is reflected in insurance premiums for young, rich, or healthy people that are disproportionately higher than the costs of the care they actually consume. Those who are forced to bear large costs that aren’t of their own doing face a loss of control. Evidence from diverse areas of research suggests that a sense of loss of control severely impacts our health and well-being.[4] (I find it ironic that forcing healthy people to bear the costs of sick people ends up impairing the health of healthy people by unduly burdening them with costs generated by others.)

These Problems in Healthcare Are Making Society Unhealthy

These problems we face are jointly causing increasingly worse health outcomes for all of society. Specifically, forms of manipulation, cognitive bias, and moral hazard lead us to consume not simply too much food, but too much unhealthy food. As a result, tens of millions of people weigh much more than they should: according to the CDC, 71.6% of the adult population in 2015-2016 was either overweight or obese.[5] This epidemic of obesity in the US is causing hundreds of billions of dollars in associated healthcare costs, $481 billion in direct healthcare costs in 2016, plus another $1.24 trillion in lost productivity, as reported by the Milken Institute.[6]

What We Can Do to Improve Social Health

Our behavior is the single largest determinant of our health: our lifestyle choices account for 40% of our risks of premature death. Social and environmental factors account for an additional 20%.[7] We control our own behavior and thus the largest determinants of our health outcomes. Only by being held responsible for our behavior will we consistently choose actions that lead to good health outcomes. Healthcare insurance certainly has a role to play, but it should be used only for problems that are beyond our ability to control. Achieving healthy outcomes is in our own best interest. We simply need our healthcare system to restore the proper incentives to us so we can return to making better choices for ourselves. How do we restore better incentives that will lead us to take actions with better outcomes?

We can decrease the amount of manipulation we’re subject to by not allowing food manufacturers to claim foods are healthy, when, in fact, they are not. We already have truth-in-labeling laws;[8] we simply need to enforce them better when it comes to food. We can also stop condoning unhealthy lifestyles. We have normalized obesity to the point where we not only accommodate it, but also convince people to embrace their unhealthy behaviors.[9] Instead, we must be less accepting and accommodating of unhealthy behavior and help people make better choices and strive to live healthier lives.

We can try to be more aware of cognitive biases and make conscious efforts not to fall victim to them.

Finally, we must eliminate the moral hazard problem in our healthcare insurance system that encourages people to adopt unhealthier lifestyles by enabling them to offload the costs of doing so onto others. Certainly we can continue to help subsidize the healthcare costs of those who need it, but we must find a better method for doing so that doesn’t distort people’s behavior. Tax subsidies, for example, provide a viable alternative.

The moral hazard situation lies at the heart of our problematic healthcare system. The ability to shift our healthcare costs onto others makes it less expensive for us to not only to adopt unhealthy lifestyles, but it also makes it less costly for us to fall victim to manipulation or cognitive bias. By eliminating the moral hazard problem, then, we make it more costly for us not only to consciously make poorer choices, but also to become victims to bias and manipulation. Without the moral hazard problem, we will be incentivized to play more active roles in ensuring our behaviors are healthy. We will become more informed about health and nutrition. We will choose to live healthier lives.

 

References

[1] https://en.wikipedia.org/wiki/List_of_cognitive_biases

[2] https://en.wikipedia.org/wiki/Moral_hazard

[3] https://www.researchgate.net/publication/307918154_Cross-Subsidization_in_Employer-Based_Health_Insurance_and_the_Effects_of_Tax_Subsidy_Reform

[4] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2944661/

[5] https://www.cdc.gov/nchs/fastats/obesity-overweight.htm

[6] https://www.milkeninstitute.org/sites/default/files/reports-pdf/Mi-Americas-Obesity-Crisis-WEB.pdf

[7] https://www.kff.org/disparities-policy/issue-brief/beyond-health-care-the-role-of-social-determinants-in-promoting-health-and-health-equity/

[8] https://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/fair-packaging-labeling-act

[9] https://www.zmescience.com/science/normalizing-obesity-dangerous-28062018/

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