How Loss Aversion Can Affect Your Profits in the At-Home Revolution
It’s a behavioral concept that’s been around as long as humans…
Aristotle said simply that objects are differently valued by those who have them and by those who wish to get them.
There’s a psychological inertia behind how people value something more if it’s already theirs than they do if it isn’t. One person may value the bird they hold far more than the two they are likely going to get in exchange, even if that likelihood is near certain.
Another related term for this is the ownership effect… And maybe even more to the point of the feeling of not having that endowment anymore is the term “loss aversion.”
Loss aversion is the idea that losses have a larger psychological impact than gains of the same size. I like to win, but I hate to lose.
Many of our employees here in the U.S. are Red Sox fans. Ask them what they would want back for Mookie Betts before the Red Sox traded him away. Well, there was nothing that the Dodgers, or any other team, could offer that would have left them satisfied.
On the other hand, if you know any Dodgers fans, you know they were terrified at the thought of the Dodgers giving up great youngsters like infielder Gavin Lux or pitcher Dustin May.
But if we cut to today, now that we have Betts as the MVP for the Dodgers, would Dodgers fans trade him for anything else? Probably not. They’re suffering from the endowment effect.
Similarly, with entitlements, now that citizens have these benefits, they attribute a lot more value to them than they would have if they had never received them in the first place. What is the response of a person receiving Medicare who is told the benefits might go away at any level? The representative or senator is likely to see outrage.
The ACA, or the Affordable Care Act, is now seen as one of those entitlements. It’s not quite yet the third rail of politics, but it might be in the future. Many attempts have been made to repeal the ACA. And while small changes have been made, attempts to defund it and declare wide swaths of it to be illegal have not worked. For the time being, it is here to stay.
Meanwhile, many estimates show how Social Security’s reserves, under current rules, could be fully depleted by the mid-2030s. The simple math is that Social Security “bankruptcy” results from retirees drawing from a program that doesn’t have sufficient assets or future contribution levels. No politician has attempted to reduce the benefits of retirees under Social Security and lived another term to tell the tale.
People value the bird they have now far more than the “benefit” Americans could enjoy (the two birds in the bush) from getting control over grossly excessive government spending.
There’s a New Bird in Hand
While this may not be a government benefit this time, in the last five months there is a new benefit that has emerged for Americans and those around the world.
It’s going to be next to impossible to take away… This has amplified a trend creating entirely new parts of the economy and has wiped out industries that have been around for decades and centuries.
I’m talking about telecommuting, or “Work From Home.”
Companies have historically been hesitant to allow telecommuting. Concerns have been raised about everything from worker productivity to reduced collaboration with the idea that face-to-face in-person meetings are a necessity. Other issues include real-world security issues over corporate and client secrets.
Former Yahoo CEO Marissa Mayer brought all the company’s home-based workers back to the office in 2013. At the time, they had a perception of reduced productivity and collaboration. Most employers shared that perspective, too.
There has historically been a social stigma of working from home among fellow employees – the perception that their colleagues are less responsive, may be slacking off, and are in general not part of the team.
This is all despite research that shows telecommuting is often more productive. Employees who work from home have found themselves to be less distracted than they were in the office (29% of those surveyed), more motivated to work extra hours to show their value (23%), and have more time for work and the rest of their lives because of reduced commutes.
Now, regardless of the research, coronavirus has forced companies and their employees to implement and understand work-from-home programs. There’s been no other option.
Employers are realizing that those issues around security, productivity, and collaboration are surmountable. And employees are recognizing they can be just as (if not more) productive from home.
Employers are realizing that those issues around security, productivity, and collaboration are surmountable. And employees are recognizing they can be just as (if not more) productive from home. Many have completely changed how they think about their jobs.
This is a benefit to employees that they’re unlikely to give up anytime soon.
Employees have experienced a new and better life because of it, according to a great majority of them, and both employees and employers have adapted to make it possible.
When reopenings occur around the world in full swing, there is no doubt some companies are going to try to roll back this experiment. However, employees have experienced a new and better life because of it, according to a great majority of them, and both employees and employers have adapted to make it possible.
This has meant more spending on:
• Connecting people remotely, from teleconferencing services like Zoom to file-sharing solutions within platforms like Google, and others.
• VPN and improved broadband services from telecom and cable providers to improve connectivity.
• Increased cybersecurity solutions.
• Providing people with the hardware to make a work-at-home situation manageable.
These examples are just the tip of the iceberg of the massive change in not only spending, but also human behavior that is underlying this shift.
That spending is actually helping entrench working-at-home as a viable option. Managers and employees who are putting their money into these solutions don’t want to see them go to waste afterwards.
As more employees and employers embrace the world of working from home as a long-term normal process rather than a short-term crisis solution, it is going to turbocharge a broader trend that has been building for over a decade…
The At-Home Revolution
This trend has been building for some time… Amazon has been delivering books so you could skip Barnes & Noble since 1998. Grubhub was launched in Chicago in 2004, and people have been ordering pizza, Chinese food, and other foods they never had access to ever since.
Now every restaurant can deliver to your home, including Michelin-star-quality restaurants.
Some restaurants are even creating competitor-Grubhub apps to make getting fine cuisine at home a sustained trend.
Not just that, but everyone has become comfortable with getting food delivered at home. There’s been no option other than to do so.
Netflix released its first movie directly to streaming in 2015, with Beasts of No Nation. The Irishman, a movie by auteur Martin Scorsese, was made with Netflix and released directly to the platform with only a limited theatric release long before the pandemic struck. People have been enjoying the idea of skipping the theater and watching movies at home for years.
And it isn’t just Netflix or Amazon Prime that is releasing movies directly to streaming… After Dreamworks’ online-only Trolls: World Tour had significant success just after the pandemic struck America, many more have decided to take the same path… from The King of Staten Island, to Artemis Fowl, and many more.
Some movie-production houses are actively talking about abandoning the theater altogether.
But that isn’t all that people have been doing to entertain themselves during the pandemic’s shelter-at-home economy. These trends have led to folks investing more in AV equipment to entertain themselves, and they’ve also bought more games, both board and video, put more money into their outdoor spaces, and have been investing more in their ability to play at home.
If working at home is the first contributor to the latest chapter in the at-home revolution, playing at home is the second.
The third is people’s need for supplying themselves at home, an integral part of spending more time there.
While for many people one of the top priorities of this category has been food delivery, it’s actually much broader. Supplying your home means stocking up on everything you need in order to be comfortable at your house.
That means delivering food and groceries – including the strangely, temporarily elusive toilet paper, of course. It also means delivering clothes, electronics, and all of the things you’d like to avoid having to go through traffic, parking, and physical retail stores to go and get.
Again, none of this is new… Amazon has been supplying more than books for decades. And e-commerce has been disrupting retail for years. Think of all the secular trends that we’ve grown tired of hearing about when people discuss the “retail apocalypse.”
Far more than just goods are the services required for spending more time at home. It’s not just ordering a gift or a meal from the comfort of your favorite chair anymore.
For years, many people have done their taxes online using TurboTax or other platforms. Now, it’s all about being able to visit your doctor without having to go to their office, or have a contractor inspect something wrong with an appliance without ever having to come into your house.
Some of these services weren’t accessible before the pandemic. Many health care plans and Medicare-compensated doctors were wary of telehealth visits before the pandemic. Once that changed, and doctors and patients jumped on board, many prefer it this way.
Doctors can see more patients, and patients don’t have to deal with whitecoat hypertension for minor issues and regular check-ups. Who wants to wait in a doctor’s waiting room or a hospital, surrounded by other sick people?
There’s one last incredibly important component to the at-home revolution… As people invest more into their homes, they focus more on protecting their homes. That includes everything from security systems to guns.
This is a self-fulfilling circle. The more money people spend to improve their home to be able to work, play, supply, and protect their houses, the more time people are going to want to spend at home. Otherwise, why did they invest in it?
Of course there are smaller offshoots of each of these big themes, from educating at home to hospice at home. Each of these trends is creating companies that are seeing huge gains in revenue and many in profit. Investors realize the value shift occurring and are pushing those stocks higher.
Causalities of the Revolution
While there are going to be many winners, it’s important to watch out as there are going to be losers, too.
Commercial real estate, from retail and theaters to high-quality office space, has a target on its back. As people and businesses look to have more work done at home, they will use commercial space a lot less. Why pay that exorbitant downtown rent for a big office building when your employees all now telecommute? This will mean higher vacancies, lower rents, and major changes in how people think about utilizing these spaces.
Already Blackstone, one of the biggest players in the commercial real estate market, has shuttered one of its commercial mortgage backed security (“CMBS”) funds because of the significant weakening of the space. This is reminiscent of the canary in the coal mine collapse of the two Bear Stearns hedge funds in 2007 that were betting on CDOs and CDSs exposed to the housing market.
The pandemic is truly transforming the world by accelerating the at-home revolution, and there are massive opportunities for those who can identify the companies that are going to be the winners of this revolution.
The pandemic is truly transforming the world by accelerating the at-home revolution, and there are massive opportunities for those who can identify the companies that are going to be the winners of this revolution. Some are already household names, and others will be in the years to come as investors realize how essential they are to households.
The very concept of loss aversion should have everyone reviewing their portfolios for losers in the at-home revolution. Meanwhile, those who don’t pay attention to this trend could end up missing out on a once-in-a-generation investing opportunity.
Professor Joel Litman is the chief investment strategist at Altimetry. He helps investors get it right when Wall Street gets it wrong by using a team of 90 accountants and analysts who sift through more than 8,000 publicly traded companies around the world.
If you’re interested in reading more from Joel, he publishes a free daily letter called the Altimetry Daily Authority – where he talks about the hidden accounting of companies that Wall Street misses, as well as his health experiments like intermittent fasting. You can learn more by clicking here.