pima

Embracing New Embracing New HorizonsHorizons

Eldorado Hotel | Santa Fe, NM

July 19-22, 2012

pima

Insurance Psyche: Understanding the

Buyer’s Mind

Jim Gallagher, USI Affinity

MidYear Meeting July 21, 2012

pima

Gallagher, put that coffee down!

pima

A Paradox of Choice

Yellow mustard -- plain old yellow mustard…

pima

• 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…

Life insurance for $500?

Let’s hope that blood pressure is under control…

pima

• 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• 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• 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 • Focusing Illusion: a specific form of framing caused by getting people to focus on one particular aspect of a situation:• Framing: the way a question or situation is framed can determine your response: see Investors, You've Been Framed.• Fundamental Attribution Error: we attribute success to our own skill and failure to everyone else's lack of it: • Gambler's Fallacy: the mistaken belief that a run of specific results in a random process must revert• Galatea Effect: some people succeed simply because they think they should:• Halo Effect: we take one positive feature of something and apply it to everything else associated with it:• Handicap Principle: animals take on handicaps to demonstrate their fitness:.• Hard-Easy Bias: in competition we're overconfident on easy problems and under-confident on hard ones, • Hawthorne Effect: studying people changes their behaviour:.• Herding: we tend to flock together, especially under conditions of uncertainty• Hindsight Bias: we're unable to stop thinking we predicted events, even though we're woefully bad at predicting the future• Hot Hand Effect: the erroneous belief that certain runs of success are attributable to skill rather than luck:• Hyperbolic Discounting: the tendency to extrapolate the cost of future payments out to infinity:• Ideomotor Effect: we sometimes physically react to ideas without being aware of our behavior• Illusion of Control: we do things that make us feel in control, even if we're not• Illusory Pattern Recognition: under conditions of uncertainty we make up patterns which can then control: see• Information Overload: too much information reduces the accuracy of the results we produce from it:• Instant History Bias: how to create a new fund with a track record:• Inter-group Bias: we evaluate people within our own group more favorably than those outside of it• Introspection Illusion: we value information gleaned from introspection more than we value our actions:• January Effect: stocks go up in January, far more than they should:• Jevons' Paradox: making an energy source more efficient means we use more of it• Law of Large Numbers: the more money you have to invest the harder it is to outperform the market:• Law of Small Numbers: the more samples you have the more likely you are to approximate to the real average:• Less-is-More Effect: the less knowledge you have the more accurate your predictions• Limit Order Effect: limit orders exaggerate apparent behavioral biases• Linda Problem: see Conjunction Fallacy.• Longshot-Favorite Bias: favorites are underpriced and longshots are overpriced.• Loss Aversion: we do stupid things to avoid realizing a loss• Man With A Hammer Syndrome: some people have a single tool and see every problem as a nail• Mental Accounting: we divide our money into different pots and then treat them all separately• Mere Exposure Effect: how merely exposing someone to something means they're more likely to prefer it• Mindlessness: the state of performing complex functions automatically, without thinking• Minsky Moment: the moment people realise they can't repay the debts they oweTrap.• Money Illusion: we value money in absolute not nominal terms• Monty Hall Problem: three doors and one prize, but which one do you pick• Moral Hazard: if someone underwrites our failures we're more likely to take risks• Noise Trading: people trade and synchronise on sentiment rather than fundamentals.• Observer Bias: observers make errors, but in a particular way based on the normal distribution• Overconfidence: we're way too confident in our abilities, which seems to be an in-built bias that we're unable to overcome without excessive effort• Persuasion Bias: the tendency to see new information as independent, failing to adjust for repetition• Placebo Effect: you can be cured by what you believe in• Priming: exposure to some event changes our response to a later event• Procastrination: the tendency to prevaricate rather than make difficult decisions that only have a future pay-off:• Pseudocertainty Effect: wording a question differently can elict a different response• Pygmalion Effect: some people fail because their managers think they should• Recency: the tendency to weight recent information more heavily• Reciprocity: our sense of fairness will override economic rationality• Regret: we don't do things we may regret• Representative Heuristic: we compare the item under consideration to whatever we happen to bring to mind• Resource Depletion: exerting self-control depletes our psychological resources, weakening our self-control• Round Number Effect: investors seem to be unhealthily attracted to round numbers• Sailing-Ship Effect: old technology can improve rapidly under the pressure of innovation• Salience: the tendency to focus on only the most easy to bring to mind features of some concept or person• Satisficing: the idea that we make "good-enough" decisions, rather than rational ones• Seersucker Illusion: for every seer there's a sucker• Selection bias: choosing unrepresentative samples of humanity in an experiment leads to unrepresentative results• Self-control: without it we don't make very good investors• Self-Enhancing Transmission Bias: people tell others about their successes more often than their failures, and their listeners don't take account of this• Sharpshooter Effect: beware experts painting targets around bullet holes• Social Intelligence Hypothesis: complex socialization was the driving force behind the evolution of large human brains, and so social behavior can explain many behavioral biases• Superbowl Effect: random events appear to predict real outcomes, but they don't:• Superstition: we can't help believing in beasties that go bump in the night, even in stockmarkets• Survivorship Bias: this is an error that comes from focusing only on the examples that survive some particular situation.• Titanic Effect: if it can't sink you don't need lifeboats• Tragedy of the Commons: we overuse common resources because it not in any individual's interests to conserve them:.• Unit Bias: we will consume whole units of food, no matter what the unit form.• Winner's Curse: winning an auction can lead to you overpaying

A Big List of Behavioral Biases

from the Psy-FI Blog at www.psyfitec.com

pima

Behavioral Economics and Insurance: Improving Decisions in the Most Misunderstood Industry

Two Systems of Thought

pima

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

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

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

Trouble with probability and risk

Risk aversionProbability Tree

pima

Trouble with probability and risk

Risk aversionProbability Tree

People tend to misjudge probability

Emotions like regret and disappointment lead to

Aversion of Risk

pima

Insurance essentially puts a price on risk based on the probability something bad will happen

And you would be wrong…

You would think that would play right into our hands as insurance marketers

People misjudge probability and avoid risk

pima

• 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

• 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

• Like when one is asked to pay premium (a sure loss) in order to avoid a 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

100% chance you lose $500

99.7% chance you lose $0; 0.3% chance you lose $54,000

pima

We offer confusing choices and make it difficult to purchase

So here we are,

trying to sell a product our prospects are

hardwired not to buy

What can we do?

pima

We have some control over the choice and buying process problems the industry has

created for itself

?

pima

fMRI

Implicit Association

Real vs. Claimed Response

Where it happens helps us understand why it happens

pima

If we can learn where and why things happen

We can design better

roadmaps

And help people make better decisions

pima

pima

pima

Time’s Up!

• About your speaker:– Name: blah blah blah blah blah– Company: blah blah blah blah blah– Tel: blah blah blah blah blah blah blah – Email: blah blah blah blah blah blah blah – Social Media: blah blah blah blah blah– Quick bio: blah blah blah blah blah blah

blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah

pima

Optimize Online Prospects & Quote

Conversion

Brian McConnell, RedEye

MidYear Meeting July 21, 2012

pima

Building a Flexible & Relevant Product

Mary Quill, Axis Accident & Health

MidYear Meeting July 21, 2012

pima

The Time is Right for Legal

David Beldsoe, ARAG

MidYear Meeting July 21, 2012

pima

Changing Ways: Understanding “How

Buyer’s Buy” Is the Key to Your Future Success

Robert Stagno, Paradysz

MidYear Meeting July 21, 2012