Morningstar Magazine - December 2017/January 2018 - 61

Thaler: There are some recent papers on this.
Our best guess is a third of the people who buy
health insurance from their employer have
a plan that is dominated by another plan offered
by that employer. By dominated, I mean regardless
of how much healthcare you consume, you'll
spend less with the other plan. Typically, that other
plan will have a higher deductible.
Ritholtz: Why do people automatically [turn] away
from the high deductible?

Thaler: They don't like deductibles. Now,
I've discovered that this anomaly existed at my
employer only because one of my smart
young colleagues explained it to me. So,
I've been experimenting this year with a highdeductible plan. It comes with the option
of a health savings account...
Ritholtz: ...thereby making it a little less high right

off the bat.

Thaler: Well, they contribute $1,000, but I put
in the max. It's a no-brainer. Everyone in
this room should have a high-deductible health
insurance plan and max out their HSA.
Ritholtz: Assuming there's a health savings account

and that the monthly cost [of the high-deductible
plan] adds up to less than the [other plan's] low deductible with the higher monthly cost.

Thaler: You won't be guaranteed to pay less every
year, but you'll certainly pay less over time.
And HSAs, unlike those dreadful flexible spending
accounts, are easy to use and are not use-it-orlose-it.
Ritholtz: Why are we so irrational with numbers?

Why do we look at that lower deductible and not think
about what the match is on the HSA, what the
total annual premiums are? Why do we just see one big
number, and it throws us completely off?

Thaler: A lot of this is inertia. At the University of
Chicago, the high-deductible plan is new,
around three years old. And the default during
open enrollment period is, if you don't log
on, you get the same healthcare plan [you had]
last year, which is better than no healthcare

plan. But there's an amusing thing, which
is the high-deductible plan is called the "savings
plan," and it has a much lower premium. So,
my colleagues in the business school look at that
and say, "You know, I'm an affluent guy. I
don't need the savings plan. I want the good plan.
The good plan just costs more, right?" What
we have here is two Starbucks. One is 20% off.
And they're saying, "No, I want the expensive one."
It's the same coffee, right? These are the
same networks, the same everything, except do
you want to pay more?
Ritholtz: Now, I'd be curious to see if that takes
place at other schools, because at Chicago, price
contains information.

Thaler: Well, I have a class I'm teaching this
year called Choice Architecture in Practice. In fact,
we had Morningstar as a client when we did
it last year. My students are going to take on this
problem. Part of the problem is figuring this
all out is really complicated.
Ritholtz: For the average person as well
as an economist?

Thaler: Right. Look, here's a trivial thing. Deductibles are quoted in annual dollars. Premiums
are quoted monthly, because we get paid monthly.
Ritholtz: Is it that hard to multiply it by 12?

Thaler: Apparently.

Michael Lewis
Ritholtz: Let's talk a little bit about baseball.
Michael Lewis publishes Moneyball, and it really
is about a different way to look at statistics.
You and Cass Sunstein write a review of the book
essentially saying, "By the way, this is all
based on the work of Danny Kahneman and Amos
Tversky, and Mike, you should check this out."5
You don't exactly say it in the review, but
it's pretty clear-hey, you missed what this book
is actually about.

Thaler: I'll tell you a quick story that tells you about
Cass Sunstein. Friday afternoon, we're having

lunch, which we did regularly, and we wander into
the Seminary Bookstore, which was down at
the university next to where we would have lunch.
I said, "Cass, I read a book this week that was
great." I showed him Moneyball. He starts looking
at it. "Oh, this is great. This is great," he says.
"Oh, we should review this." Now, he hasn't read
anything yet, right? I don't think that way-
that if I read something, I should write about
it. I was just getting to know Cass at the time. So,
he buys the book. Monday, I get a six-page,
single-spaced review. This is how we ended up
writing the book. He would write a first draft and
then I would painfully...
Ritholtz: ...clean it up.

Thaler: Well, Thalerize it. So, I wrote it up, and
I put in a lot more baseball. We [submit it to]
The New Republic back in the good old days of The
New Republic. And he says, "Oh, no, there's too
much baseball. They won't take it." I said,
"Look, leave it in. Let them take it out." So, we get
it back from the editor, and the guy says this is
great but more baseball! Then, Cass started taking
me seriously.

But back to Michael. He and I got to know one
another after that. That got him interested
in behavioral economics and eventually led him
to write his most recent book, about Kahneman
and Tversky.
Ritholtz: The Undoing Project.

Thaler: I kept saying, "You're kidding, right?
You're going to write a book about these
two psychologists who just spend their time
talking to one another?"
Ritholtz: And apparently laughing.

Thaler: And laughing. I'm one of the few people
that actually saw them working together,
because that year I was stalking them, I would
wander up the hill. Danny's office was about
100 yards up the hill from me. And sometimes I'd
wander in, and he and Amos would be
working. So, I saw it in action. The way they
wrote was to argue over every word.

5 Thaler, R.H. & Sunstein, C.R. 2003. "Who's on First," The New Republic," Sept. 3.

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