4. A Paradox of
Choice
Yellow mustard -- plain
old yellow mustard…
pima
5. Let’s hope that
Life insurance blood pressure is
for $500? under control…
• Then we make it hard to find the price – we want to know a whole lot of very personal
stuff before we’ll tell you what you have to pay.
• And for some, we won’t even let them buy what we’re selling.
• That boulder is almost to the top of the hill now…
pima
6. • Adverse Selection: you should only offer health insurance to those who don’t need it
• Affect Heuristic: we use feelings not logic to make snap decisions, even when we don't need to
• Akerlof's Lemons: why the market for used cars doesn't work properly: see Akerlof's Lemons
• Ambiguity Aversion: we don't mind risk but we hate uncertainty
• Anchoring: our habit of focusing on one salient point and ignoring all others, such as the price at which we buy a stock
• Attention, Limits of: our inability to attend to multiple things, and the way this is exploited
• Authority, Appeal to: we tend to thoughtlessly obey those we regard as being in positions of authority
• Babe Ruth Effect: winning big but rarely beats winning often and small
• A Big List of Behavioral Biases
Backfire Effect: if you present some people with evidence contradicting their beliefs they will believe them all the more
• Barnum Effect: we see insightful information in random rubbish
• Beauty Effect: we attribute qualities to people based on their appearance
• from the Psy-FI Blog at www.psyfitec.com
Benford's Law: in finance numbers starting with 1 are more frequent than those starting 2 and so on
• Bias Blind Spot: we agree that everyone else is biased, but not ourselves
• Bird in the Hand Fallacy: the idea that dividends are more important than capital gains.
• Bystander Effect: people waiting for others to take the lead when someone else in is trouble
• Choice Overload: too much choice makes us indecisive
• Clever Hans Effect: we give off unconscious cues that are unconsciously picked up on
• Cocktail Party Effect: the auditory ability focus on one particular stimuli, like your own name in a noisy room
• Cognitive Dissonance: the effect of simultaneously trying to believe two incompatible things at the same time
• Commitment Bias: once we'e publicly committed ourselves to a position we find it difficult to retreat
• Confirmation Bias: we interpret evidence to support our prior beliefs and, we ignore evidence that contradicts it
• Conjunction Fallacy: the conjunction of two events is always less likely than a single event
• Conversational Bias: we tend to present ourselves in the best possible light
• Data Mining Errors: if you mine the data hard enough you can prove anything:
• Denomination Bias: we're more likely to spend small denomination notes than large ones:
• Disaster Myopia: an in-built tendency to forget really nasty stuff after it's stopped happening for a while
• Disappointment Aversion: we avoid situations that produce worse results than we wanted, even if objectively good
• Disposition Effect: we prefer to sell shares whose value has increased and keep those whose value's dropped
• Dread Risk: an irrational fear of extreme events.
• Dunning-Kruger Effect: some people never learn by experience
• Economic Reflexivity: the way that the economy changes people's behavior, which changes the economy
• Easterlin Paradox: between countries, having more money doesn't make you happier:
• Familiarity Effect: being familiar with something makes you favour it:
• Fallacy of Composition: the tendency for individuals to act in their own self interest and, in by doing so en-mass, to cause
•
•
themselves to lose out
Fallacy of Frequency: we see regular patterns where none exist:
False Memory: memory is a construction, not a direct recollection
pima
7. Two Systems of Thought
Behavioral Economics
and Insurance:
Improving Decisions in
the Most Misunderstood
Industry
pima
8. Fast and Slow – System 1
• System 1
– Thinks Fast
– Always on
– Looks for patterns and
finds them
– Answers questions,
even if it has to make
them up
– Sometimes makes
mistakes
pima
9. Fast and Slow – System 2
• System 2
– Thinks slow
– It is analytical and
reflective
– It tells stories
– It will sometimes stop
System 1 to analyze the
problem, and that’s
good
– But…
pima
10. Fast and Slow – System 2
• System 2
– Capacity limitations;
can’t review all of
System 1’s conclusions
– Sometimes creates
stories to support the
incorrect conclusions;
justify why it was good
to take the wrong
shortcut
– So, Systems 1 and 2
sometimes make
errors
pima
12. Trouble with probability and risk
People tend to
misjudge probability
Emotions like regret and
disappointment lead to
Aversion of Risk
Probability Tree Risk aversion
pima
13. Insurance essentially puts a price on risk based
on the probability something bad will happen
People misjudge probability and avoid risk
You would think that would play right into our
hands as insurance marketers
And you would be wrong…
pima
14. • Because…
• The risk aversion becomes
risk seeking in some
scenarios
• When one choice is a sure
loss, and the other choice is
a greater loss that is not
certain to happen
• People tend to take their
chances and not accept the
sure loss hoping that the
possible greater loss
doesn’t occur
pima
15. • Because…
• The risk aversion becomes
risk seeking in some
scenarios
• When one choice is a sure
loss, and the other choice is
a greater loss that is not
certain to happen
• People tend to take their
chances and not accept the
sure loss hoping that the
possible greater loss
doesn’t occur
pima
16. 100% 99.7% chance you lose $0;
chance you 0.3% chance you lose $54,000
•lose $500 one is asked to pay premium (a sure loss) in order to avoid a
Like when
possible greater loss (whatever risk is being insured)
• So guess what Sisyphus, the very people we’re trying to sell to are
hardwired to avoid buying what we’re selling
pima
17. o here we are,
rying to sell a product our prospects are
ardwired not to buy
e offer confusing choices and make it
difficult to purchase
What can we do?
pima
18. e have some control over the
choice and buying process
problems the industry has
created for itself
?
pima
19. fMRI
here it happens helps us
understand why it happens
eal vs. Claimed Response
Implicit Association
pima
20. f we can learn where
and why things happen
e can design
better roadmaps
nd help people make
better decisions
pima
24. Optimize Online
Prospects & Quote
Conversion
Brian McConnell, RedEye
MidYear Meeting
July 21, 2012
pima
25. Building a Flexible &
Relevant Product
Mary Quill, Axis Accident & Health
MidYear Meeting
July 21, 2012
pima
26. The Time is Right for
Legal
David Beldsoe, ARAG
MidYear Meeting
July 21, 2012
pima
27. Changing Ways:
Understanding “How
Buyer’s Buy” Is the Key
to Your Future Success
Robert Stagno, Paradysz
MidYear Meeting
July 21, 2012
pima
Notas do Editor
It’s hard to sell insurance. I know that’s something you already know, and probably a crappy way to start this presentation because it won’t ignite anything. But do you know why it’s hard to sell insurance? I have some thoughts about that I’d like to share with you.
As an industry, we’ve made it hard on ourselves. I’m sure we could identify many examples of hurdles we’ve created. One example is the paradox of choice -- too many companies offering too many choices without enough differentiation among them.
And I don’t know if the price is right, but I do know it’s often hidden. We don’t show the final price until after we’ve collected a lot of very personal information, some of it in the form of bodily fluids we collect. And after all that, sometimes we won’t sell at any price.
There are cognitive and behavioral biases hardwired into the brains of consumers, and some of them make it hard to sell insurance. I recently found this list of over one hundred biases which I will let you read now… The biases exist because of how the mind works.
An important thing to understand about how the mind works is that it has two systems of thought. Now, I didn’t make this up; smart people like these two Ivy League professors did. I’m just going to relay a slice of what they’ve written about.
So, back to the two systems. System 1 thinks fast. It’s always on, looking for patterns and finding them. It answers questions; if it doesn’t know the answer it will make up a different, related question that it can answer. But sometimes it makes mistakes.
Then there is System 2. It thinks slow. It is analytical and reflective. It tells stories. Sometimes it will stop System 1 to analyze a problem, which is good. But…
System 2 has capacity limitations. It can’t review all of System 1’s conclusions. When it does engage, it will tell a story about what it finds, and sometimes the stories support the incorrect conclusions or justify taking the wrong shortcut. So, Systems 1 and 2 work very well together most of the time, but even working together they sometimes make mistakes.
Our minds are prone to make mistakes judging probability and assessing risk. On the left we have a probability tree – this one happens to be related to the Monty Hall problem – number 73 from that list you read. On the right is an illustration of Prospect Theory demonstrating risk aversion.
Even a relatively simple probability tree gets complicated quickly. And asymmetrical curves result when human emotions like regret and disappointment are introduced into the decision-making process. So, the takeaway here is that people are prone misjudge probability and they have an aversion to risk.
Given that insurance essentially puts a price on risk based on the probability that something bad will happen, and that people tend to misjudge probability and avoid risk, you would think that would play right into our hands as insurance marketers. And you would be wrong…
Because the risk aversion becomes risk seeking in some scenarios. For example, when one choice is a sure loss, and the other choice is a greater loss, but one that is not certain to happen, then people tend to take their chances. They do not accept the sure loss that is small in hope that the greater loss doesn’t occur.
So what would that look like in real life? Well, it might be presented as a sure ‘loss’ of say $500 versus a loss of say $54,000 that is only 0.3% likely to happen. People would likely prefer to keep the $500 in their pocket and hope the $54,000 fire happens to their neighbor.
So guess what Sisyphus? We are trying to sell a product our prospects are hardwired not to buy. We also offer too many confusing choices and make it difficult to purchase. So, what can we do?
Well, we could try to simplify the choices, offer greater transparency in pricing and make the buying process simpler. But why bother with that when there’s still that wiring problem? What can we do about that?
As much as we would like to, we can’t just go in and change the wiring. But, we can understand better how it works and tools like fMRI and Implicit Association can help us. Knowing where something happens in the brain gets us a lot closer to understanding why it’s happening, and helps separate real response from claimed response.
If we can learn where and why things are happening, we might be able to avoid some of the cognitive and behavioral biases. We could design products that are easier for the mind to understand, and have better roadmaps to navigate them. And that will help people make better decisions about the risks they are trying to insure.
So if we can get at neuroscientist, a behavioral economist, and an actuary together in a lab to study the neuroscience of individual insurance buying decisions, then maybe at a future PIMA meeting there will be a presentation to enlighten us about what they found.
Only 15 seconds left…I hope I sparked some interest, and maybe, just maybe, ignited something. Thank you.