Behavior Economics

The Cost of Quitting for Bernie Sanders

QuitterOh man! I was a way for four days beyond the reach of wifi and cell phones at El Karama Lodge going for one of my last safaris in Kenya before disembarking for China (gratuitous pics at the end of the post) and look what happens! Clinton secures a majority of the pledged delegates, is declared the presumptive nominee, and Sanders lays off half of his campaign staff, but still doesn’t quit! What gives? Why won’t Sanders quit? What could Sanders do instead? Can science explain it? Why, yes. Yes, science can explain it.

Prospect Theory

Today gentle reader, we turn our attention to Tversky and Kahneman‘s Prospect Theory!

People do not normally think of relatively small outcomes in terms of states of wealth but rather in terms of gains, losses, and neutral outcomes (such as the maintenance of the status quo). If the effective carriers of subjective value are changes of wealth rather than ultimate states of wealth, as we propose, the psychophysical analysis of outcomes should be applied to gains and losses rather than to total assets. This assumption plays a central role in a treatment of risky choice that we called prospect theory.

Kahneman & Tversky Choices, Values, and Frames

In the decades since the dynamic duo published this seminal work, many studies have been published strongly suggesting that people actually do make decisions from the relative perspective of gains, losses, and maintaining the status quo.

Hey wait a minute, clever science guy! your favorite drunk uncle declares. You can’t fool me. They’re talking money not running for the presidency! Square that circle, will ya bub!

RiskFirst, research shows that people make other decisions using a similar framework. And second, when people make judgements under uncertainty, no matter the judgement, they tend to be risk averse. Risk aversion occurs when a person prefers a sure thing over an uncertain possibility. Obviously Sanders’ run was an uncertain possibility, so he didn’t prefer the sure thing, losing, he preferred the uncertain possibility, winning.

Let’s face it, Sanders’ entire run has been a judgement under uncertainty. It was deemed a long-shot effort since Clinton led him 60% to 8% in polling from the get go. But, his campaign has not been risk averse! If anything it has been risk seeking — preferring the uncertain possibility to the sure thing.

Risk seeking is worsened when dealing with improbable gains kinda like buying a lottery ticket. When faced with a certain loss, people tend to become even more risk seeking, a phenomenon that Kahneman and Tversky termed, the certainty effect. The closer Sanders gets to losing the nomination, the more risk he is willing to take in order to secure it. Thus, his attacks on Clinton, Wasserman Schultz, and the Democratic Party.

Then there is risk stupid which is usually worsened by the drunk effect and preceded by the words, hey watch this!

Loss Aversion

RollerCoasterWhat a roller coaster ride it’s been for Sanders: first, there is no chance, then he wins Michigan and Democrats Abroad, and there is a glimmer of hope. The end of March, though, is fraught with Bernimentum! April and May are a buzz kill but the fuzzy-headed Berners are defiant and calling out the Clinton ‘chine! Rigged! Rigged! Rigged!

What has all this upping and downing done to poor Sanders’ psyche?

Well, Sanders may have been risk seeking when he entered the race and may have become more risk seeking through April and May as his chances of winning decreased. But, with the cruelty of  June — always the cruelest month somehow, amiright? — he has become down right loss averse, too! Loss aversion is the tendency to weight losses greater than gains — about two to one — and so avoid incurring a loss at the expense of a gain. Quitting the race seems more disadvantageous to Sanders than remaining in the race seems advantageous. And losses always seem worse than gains. He don’t want to incur that loss when he quits the race. Sanders is essentially an adrenaline junkie, now. Wait, no, that’s another blog post altogether.

The Endowment Effect

DorianGray-620xSanders was willing to pay (WTP) his time, effort, stress and strain, and public criticism to run for the nomination. In a sense the price was quite high. He is a helluva tough old coot, I’ll give him that. At 74 years of age, he is holding up better than most of the Republicans have on the trail, but the campaign has had to take some kind of toll on the spry old grandpa. Unless he has pulled a Dorian Gray! Crap, I never even thought of that before, but it is obvious, ain’t it? He’s swung a deal with viagra and will be flogging those pills after it is all over!

What might Sanders be willing to accept (WTA) as payment for exiting the race? Whatever the Democratic Party and Clinton have offered so far — and you should be sure that they have offered him plenty privately as well as publicly — it obviously hasn’t been enough. This is because loss aversion is linked to both the endowment effect and status quo bias.

People often want much more to give something up than they would be willing to pay to acquire it. This is called the endowment effect. Sanders, as did many of his supporters, began to see winning the nomination as a real possibility. Once that happened, he began to overvalue the nomination. He began to see it as his. Now, he wants much more to give it up. This isn’t because the appeal of running for the nomination or even the nomination has become so very much more special; it is because the pain of quitting the race has increased the longer he has run and the more he has told himself not only he could win but would win.

He is averse to the loss of what he has perceived as his. Whether the nomination ever was his or not or ever a realistic possibility or not is not the point! It is the change in our cognition when we begin to perceive something — rented house, anyone? — as yours.

Status Quo Bias

cautionsignAnother factor causing Sanders to be reluctant to leave the race is status quo bias. That is the preference for the current state of affairs. Studies have demonstrated that people’s preferences can be manipulated by presenting an option as the status quo. Once a condition is perceived as the status quo, the risk of giving it up seems larger than the advantage of staying with it. Sanders is running. He prefers to be running.

For Sanders the salient point about giving up his run is not the benefit to his progressive cause or the advantage he might gain in bargaining his candidacy away, but the change in the status quo (running for the nomination). The act of running is dearer to him now than it was a year ago. For Sanders dropping out now would make things worse since he would not have his platform for championing his progressive causes.

In this instance, he is engaging in some severe cognitive dissonance to convince himself that his attacks on Clinton, Wasserman Schultz, and the Democratic Party are true and worthwhile.

Fairness and Justice

FingerPointingPeople love to play the blame game, unless it is them being blamed, right? Then it is a bad stupid useless game to play in which there are no winners. No one likes to look back and see that the decision to hold the beer of your favorite drunk uncle after he said, Hey watch this! and he tried to launch himself into the air using the charge from his truck’s air bag led to him breaking his leg and pelvis and your mother to berate you all the way to the hospital for having enabled his risk stupid was a bad idea. This is purely a hypothetical mind you. It never really happened. Honest. That kind of regret could be scarring for life and require some intensive personal therapy to undo.

But, because people can anticipate such blame and regret after a mishap involving bodily injury or just lots of screaming and red-faced yelling and stomping up and down and then the endless sobbing tears, they tend to be reluctant to voluntarily assume additional risk unless, of course, they are risk stupid. If the problem can be framed as reducing risk, then people are willing to assume it. But, when it is framed as being beneficial in some way to assume more risk, people are apt to reject it outright.

When the additional risk involves an area of morality — the environment or public safety or mass shootings of first graders — then many people are outraged that they have even been asked to take a higher risk, especially if they are being compensated for it. A good example is the disposal of nuclear waste leading to the “not in my backyard, you don’t” response. Compensation for the additional risk is seen as a bribe.

Kahneman, Knetsch, and Thaler way back in 1986 proposed a purely hypothetical situation about a profitable company, a recession, and a reduction in wages. The problem of course is that no one could image anything like this ever happening. Anywho, they summarized the study in Choices, Values, and Frames.

People were asked to respond to a question in which a profitable company cut wages 7% during a recession. More than half, a whopping 63% indicated that it would be unfair. But, when the question was phrased as a profitable company raising wages 5% during a recession but with 12% inflation (note that mathematically it is the same outcome), 78% indicated that it was fair while only 22% as unfair. I told you people could be manipulated using this shit. You watch what politicians and corporations and bosses be telling you!

The wage cut is seen as an out-of-pocket cost while the increase that doesn’t match inflation as an opportunity cost. One is a perceived loss — always more painful and difficult to take — and the other is a foregone gain — always less painful and easier to take. This is particularly apparent when fairness is in question.

The Upshot for Sanders

The approach to Sanders leaving the race for the nomination should be one in which his withdrawal from the race is framed as a gain and not a loss, that leaving the race is the status quo. Knowing that the WTA offering must be significantly higher than the WTP cost, what could Clinton offer Sanders to convince him to leave the race or at least not damage her and the Democratic Party as much? If during the month of June, we see Sanders rhetoric about the rigged system and unfairness of the race rules and biasedness of Wasserman Schultz and the Democratic Party soften, then you know that sweet spot has been found, but if he continues in his current vein, then you know it hasn’t.

 Safari Pictures

A few of my more favorite pictures from the safari.

10 replies »

  1. Haven’t thought about Tversky and Kahneman‘s Prospect Theory in years. had a good time explaining it to the hubby who said “wth is that?” when read aloud to him. Thanks..I got to be smarter than the man this morning! lol


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