I am currently reading Freakonomics by Steven Levitt and Stephen Dubner.  About 40 pages into the book, I’m hooked.  In those first 40 pages they discuss the incentive behind nearly everything we do, and how we are driven by different types of incentive.

For instance, they talk about the effect of implementing a $3 fine to anyone who shows up late to pick their kids up from daycare.  Before the fine was implemented, the daycare had about 5 parents per week who arrived late to pick up their kids.  Naturally, the daycare has to have someone work late to watch the kids until they are picked up, costing the daycare in overtime.

However, after they implemented the fine, the number of late pickups actually increased.  The theory behind the reaction to the fine was that now there was only a monetary value(monetary incentive) to being late to pick up your kids, rather than just a moral incentive.

Before the fine, it was the guilt (moral incentive) a parent felt for being late and causing someone to have to work extra hours to take care of their kid.  But now they didn’t have the guilt because they knew the person was getting paid extra to keep track of their kid.

Is the extra $3 worth skipping the last few holes on the golf course?

This reminds me of a discussion I had with an oilfield services technician a couple months ago who was complaining about his healthcare bills.  He had a small spot removed from his arm, paid $30 out of his own pocket for the procedure and didn’t bother having his insurance cover the cost.  A few months later he had the same service performed, but this time had his insurance cover the cost.  It still cost him $30 for the co-pay, but his doctor billed the insurance company $900 (which could potentially raise his premium) for the procedure which was no different than the first procedure.  So what was the point of having insurance?

This got me thinking.  What if there were no such thing as insurance?  No, not: What if we quit having insurance? (They discuss this strategy in the book too, and how it actually backfires.)

What if there were no such thing as insurance, ever.  If you get in a car accident and the court determines you are at fault, you pay to fix the other guys car out of your own pocket.  If it’s cheaper to buy the guy a new car, so be it.  You also pay to fix your own car, if you so choose.

Think about the effects of that situation.  Do you think we’d see as many high end cars on the road? 

If you knew you’d have to pay to fix the other guys car if you broadsided him, would you take that cell phone call while driving in rush hour traffic?

Would you wear your seatbelt if you knew that you’d have to pay your own medical costs (monetary incentive) if you were thrown from the car in an accident?

The very fact that we have such a thing as ”insurance” has led to many modern miracles, for sure.  Cancer treatment for patients is not cheap, and there’s no way we’d have such technology if patients had to pay for the treatment out of their own pocket (or maybe we’d have the technology, it would just be cheaper since the company has a financial incentive to make it cheaper).  The medical field has extended the lifespan far beyond what Cro-Magnon man could have dreamed, and our life expectancy is getting longer by the day.

On the other hand, do you think we’d have such a thing as stomach stapling for our obese population if they had to pay for the procedure out of pocket?  Do you think we’d even have such an obese population if people had foot their own medical bills?  It sure would create incentive to live a healthier lifestyle.

Incentive. It’s all about incentive.  We lose the incentive to drive attentively if we know that we’re covered by insurance (i.e. someone else will pay the bill for my screw-up).  I can live any lifestyle I want because I know the medical technology exists to fix me, and chances are, my insurance company will pay for it.

So what if there were no such thing as insurance?  The moral and social incentive to live a certain way would be just as powerful as the financial incentive.

Think about it from both sides of the coin, I think you’ll be surprised at how engaged your brain becomes.

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