Real live American human beings may have their own peculiar way of thinking about all kinds of risk, including long-term care (LTC) risk.
Daniel Kahneman and his partner, Amos Tversky, created a new category of behavioral economics – prospect theory – by studying an apparent gap between how a professor of statistics would make decisions about risk and what ordinary people actually do.
When Kahneman and Tversky created prospect theory, in a book published in 1979, they suggested that ordinary people tend to:
- Care more about gains and losses than the final outcome of a transaction;
- Care more about the size of a gain or loss in percentage terms than the absolute numerical size of the change; and
- Get more pain from losses than they get joy from comparable gains.
Because of the way people weight gains and losses, seeing the value of a portfolio drop to $100, from $200, would hurt more than seeing the value drop to $900, from $1,000, even though the consumer loses $100 in both cases, Pincus said.
Researchers tested four different explanations of LTCI concepts, with each concept explanation fitting in one of the four cells in the frame: