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2014
Behavioral Economics:
Good and Evil Practices in
the Insurance and Financial
Industries
Bob Thomas
Director of User Experience,
Liberty Mutual Insurance
(email) robertl.thomas@libertymutual.com
(twitter) @bobthomas
2014
Classical Economics:
We Are All Rational Creatures
2014
Source: CBS. This photo is used here for personal, non-commercial use.
2014
Behavioral Economics:
We Are Emotional and Irrational
2014
Source: CBS. This photo is used here for personal, non-commercial use.
2014
Principles of Behavioral Economics
2014
๏ Principle 1: Mental Shortcuts
๏ Principle 2: Value Assessments
๏ Principle 3: Emotional Impacts
FREE!
No Annual Fee
2014
Principles of Behavioral Economics
2014
๏ Principle 1: Mental Shortcuts
Source: http://ozeanmedia.com/wp-content/uploads/2013/05/brain_shortcuts.jpg.
This image is used here for personal, non-commercial use.
2014
Mental Shortcut:
Reliance on Defaults & Relative Choices
2014
๏ People rely on defaults as complexity increases
2014
Mental Shortcut:
Reliance on Defaults & Relative Choices
2014
๏ To help consumers, this
life insurance estimator
includes default values
2014
Mental Shortcut:
Reliance on Defaults & Relative Choices
2014
๏ Relative choice: we value products based on
comparisons with other similar products
2014
Mental Shortcut:
Reliance on Defaults & Relative Choices
2014
๏ Buying insurance can be very complex
๏ Potential customers may refuse to add
coverages that may benefit them
2014
Principles of Behavioral Economics
2014
๏ Principle 2: Value Assessments
2014
Value Assessment:
Love of Free
2014
๏ “Free” triggers consumer reactions that
cause people to overlook underlying math
2014
Value Assessment:
Love of Free
2014
๏ Most people carrying
greater than $1000 in
balances instinctively
select a card offering…
๏ 15% APR + No Annual Fee
Free = No Annual Fee
(Example: $150 in first month)
๏ vs. 10% APR + $50 Annual Fee
(Example: $100 in first month)
2014
Value Assessment:
Hyperbolic Discounting
2014
๏ We buy or borrow now at the cost of
having less money in the future
2014
Principles of Behavioral Economics
2014
๏ Principle 3:
Emotional Impacts
2014
Emotional Impact:
Risk Aversion
2014
๏ People would rather save money “under the
mattress” than invest in the market
2014
Emotional Impact:
Risk Aversion
2014
๏ Progressive Insurance offers a Coverage Checker
that highlights areas where an individual may be
buying too little (or too much) insurance
2014
Emotional Impact:
Self-Control Facilitation
2014
๏ We recognize the need for self-
control but need support
๏ We are often willing to accept
downsides of third-party control to
achieve goals
2014
Emotional Impact:
Self-Control Facilitation
2014
๏ Insurethebox provides low-mileage car
insurance. They give their customers a free
telematics device to keep track of mileage
2014
In Summary: What Behavioral
Economics Shows Us
๏ We make financial decisions intuitively,
and we’re not very good at it
๏ It helps to understand these principles
behind our financial decisions:
1. Mental Shortcuts
2. Value Assessments
3. Emotional Impacts
2014
Behavioral Economics:
Good and Evil Practices in the Insurance and Financial Industries
2014
Bob Thomas
Director of User Experience
Liberty Mutual Insurance
Email:
robertl.thomas@libertymutual.com
Twitter:
@bobthomas
Original photo source: http://3.bp.blogspot.com/-
3d5cnvWaRhw/UaYN9yTucfI/AAAAAAAAAPk/CDlSqE3DJzU/s1600/C
loseUpGuard_Blog.jpg.
This photo is used here for personal, non-commercial use.

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