Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them. - Laurence J. Peter

Tuesday, November 04, 2008

Fixing the weight-loss industry with financial incentives

Followup to: Obesity is a choice

The weight-loss industry is notorious for being full of ineffective magic-pill promises: 5-minute-a-day machines, fad diets, pills, etc. This bothers me. It offends my political biases when free markets don't come up with good solutions.

It occurred to me that a better way to do this might be pay-for-performance. A company could promise "if you don't lose weight, we don't get paid". And then their system will have to be optimized for whatever actually works, whether that's diets, exercise regimes, pills or magnetized rainbow crystals. That solves the bad incentives for the industry. But then you have a dubious incentive for the consumer - they now have a financial incentive to stay fat. Obesity correlates with low incomes, so maybe this will matter to a lot of people.

I have an idea for a solution. Set up a system where you can bet on whether people will lose weight. People who want to lose weight bet that they will lose X amount of weight (or maybe body fat or whatever their goal is) in X amount of time. Now they have a financial incentive to lose weight, and a disincentive to not lose it. There could also be a side-industry of consultants who give you diet/exercise/unicorn pills and get a cut of your win only if you win.

Who would bet against the weight-loss hopefuls?

Despite aligning the incentives properly, I'm guessing that a lot of people will still fail to hit their weight targets. It might be hard to predict whether any individual person will succeed or fail, but in large numbers (especially if you control for demographics, initial weight, gender, etc.), the number of people expected to succeed or fail will probably be quite predictable. There would be a mini-industry of analysts who can predict the probability of success of any particular hopeful, and they'd be willing to bet on slightly-favorable odds against you. Competition among analysts would keep their bets close to fair. They'd bet small amounts across large numbers of people to get a near-guaranteed positive return. If you're a weight-loss hopeful, presumably you won't mind if your bet is 5% less than fair; that's the price of the system, and winning is up to you anyway (you and your consultant).

The idea of betting against people's health is a bit repugnant, but I expect this system would have a good chance at being one of the best weight-loss programs available. And results are more important than repugnance.

(This idea is somewhat similar to the idea behind the startup Stickk.)


Blogger Patri Friedman said...

The idea of pay-for-performance (and the resulting moral hazard problems) are quite general. Robin Hanson has proposed pay-for-performance health insurance, for example. Weight has the advantage that it is easily measurable.

Pay for performance sounds like a good idea. Presumably people actually want to lose weight. I guess the question is whether their financial disincentive is a stronger or weaker effect than the better financial incentives of the company. Put another way: do diets fail because companies offer bad ones, or because people don't stick to 'em?

Hmm...if a third-party did pay-for-performance, you could get the good w/o the bad. For example, if thin people are cheaper for health insurance companies, the company could pay-for-perform a weight loss consultant. The consultant would still be incented, and you wouldn't be profiting from failure.

5:16 PM


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