Commonality between Climate Change and Pension System Collapse ① (English)

The other day, I wrote that the pension system in Japan is in danger.

Since the aging society is proceeding rapidly in Japan, there won't be enough young people (working population) to support elderlies (who are receiving pension).

It seems like it is obvious that we have to do something. But unfortunately, few people (of course including politicians) want to address this problem.

In the previous article, I argued that this problem is based on fundamental flaw of democracy: the system that does not take future generation's opinion into account.

In this article, I would like to think about this problem from a different aspect: psychological perspective.

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Think about the next case.

"You are gonna flip a coin. If it is head, you earn 110 dollars. If it is tail, you are gonna loose 100 dollars. Do you wanna try?"

What would be your answer?

Most people would answer "NO".

However, economically rational agent would answer "YES" because expected value is positive.

Why don't people try this?

Kahneman (2011) explains that it is because people are psychologically afraid of loss more than gain.

Thinking, Fast and Slow

Utility that we gain when we get the head (meaning gaining 110 dollars) is lower than the utility that we loose when we get the tail (meaning loosing 100 dollars).

This is one of the reasons why people are afraid of changing something.

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Reforming pension system definitely involves pain. Some people need to suffer to some extent to reform it but this psychological feature makes it difficult to do it.

Don't you think that this is similar to one of the most pressing problems of the world today?

Climate Change.

IPCC (2014) concluded that Climate Change is due to human industrial activity and it is crucial that we take action now. Otherwise, there will be a "catastrophic" consequences, they argued.

2014 in Science: Ipcc Fifth Assessment Report, October 2014 Lunar Eclipse, April 2014 Lunar Eclipse, Solar Eclipse of October 23, 2014

However, stopping CO2 emission and other greenhouse gas definitely involves pain. Many people need to abandon their vested interest they enjoy now.

This is why people hesitate to tackle this problem.

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Learning that we are inherently "loss-averse" somewhat helps resolve this problem, I believe.

Why?

Just as we saw in the experiment of coin toss, if we know that we are systematically loss-averse, we can try to think the problem rationally and invest on the more beneficial one, not relying only on our emotion, which tends to go for "loss-averse".

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"No Pain No Gain" is a well-known aphorism.

Knowing that we tend to overestimate pain helps us tackle problems, enabling us to focus more on the Gain side.