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Well, did you know that there's an
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element of psychology in that comes into
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play when you think about how we think
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about paying our taxes, especially when
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you look at things like losses and
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gains. Warren professor Alex Reese Jones
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has taken a deeper dive into this
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component of taxes, and he joins me here
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in studio to talk about it. Great to see
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you again, to see you. I'm doing great.
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How are you? Thank you. Uh, what was it
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that first got you thinking about this
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component of psychology in taxes? Well,
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uh I mean this is a little dated now,
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but when I was in graduate school in
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like the late 2000 as I was very
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interested in behavioral economics,
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which is an area of economics that's all
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about trying to build more models from
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psychology into the way we do kind of
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regular economics. uh and at that stage
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that was a very well-developed field but
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it wasn't yet like as successful as it
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could be because a lot of it was focused
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on say small lab experiments and there
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weren't an enormous number of
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demonstrations of this stuff being
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really useful to think about big
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economic behaviors and so a thought I
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had is that no I I think people uh could
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be influenced quite a lot by psychology
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when thinking about taxes and if that's
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true that would count as a big economic
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behavior and understanding how to model
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it better through psychology would be
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really useful just for doing regular
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economics. Um that turned out to be
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right I think and uh and there's been
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many other examples like that in the
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years since but that's what initially
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was my like point of entry into the
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field. And so I mentioned at the top
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that component of losses versus gains. I
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I know you wrote about it in in part
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about the losses component about how we
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think about working the losses that we
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have you know kind of in our tax
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preparation every year. Yeah. So yeah,
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let me let me summarize the the idea and
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how you know losses and gains are you
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know map into it. I mean the the thing I
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was trying to get at in this study was
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how uh you know the idea of loss
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aversion would play out in tax settings.
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Now the term loss aversion sounds pretty
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general. you know, you can imagine it uh
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applying to a bunch of things, but when
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behavioral economists use it, they mean
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a very particular thing. And they're
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referring to this reproducible finding
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that people seem to value uh slightly
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increasing a gain less than slightly
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decreasing a loss. So like to illustrate
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like let's say I'm asking you how much
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you value a dollar that I'm holding and
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you think about it and you know you
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would hope you'd say, "Oh, a dollar is a
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dollar. I'll think of my value for
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that." And then to put in different
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frames, I could say, well, what if I
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already owe you $10? So this dollar is
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getting mixed in and turning 10 to 11.
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Or I could say, what if you already owe
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me $10, and so this is turning you
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paying me nine or 10 into you paying me
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nine. And in either case, I'm just
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giving you an extra dollar. A dollar is
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a dollar. But the thing you see very
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reproducibly is that people care a fair
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bit more about making the loss a little
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bit smaller compared to making the the
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gains bigger. And you know, that's not
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so surprising to many people, right?
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Like people people don't like losing.
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People don't like losses. Thank you for
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listening to the ripple effect. We hope
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you found this episode informative and
00:03:02
engaging. Don't forget to subscribe and
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00:03:08
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