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Behavioural Economics:
What is it and what does it mean for the
Insurance profession?
Paul Laughlin
(former Head of Custom...
How we really make decisions
Would you rather…
A B
Take a 50% chance of
gaining £1,000 and a
50% chance of gaining
nothing...
How we really make decisions
Would you rather…
A B
Take a 50% chance of
losing £1,000 and a
50% chance of losing
nothing?
...
Behavioural Economics (BE)
Two modes of thought:
Intuition (fast, automatic, effortless, associative, difficult to control...
10 BE biases highlighted by FCA
Present Bias
Reference Dependence and Loss
Aversion
Emotional Drivers
Overconfidence
Overextrapolation
Projection Bias
Framing, Salience and Limited
Attention
Mental Accounting and Narrow
Framing
Decision Making Rules of Thumb
Persuasion and Social Influence
Relevance to the Insurance industry
Insurance customers particularly likely to suffer from BE
biases when making insurance...
Potential for Good or Evil
“Firms play a crucial role in
shaping consumer choices
through product design,
marketing and th...
Examples of the Dark Side
FCA have stated they will use these as early warnings:
1.  Rip-offs: Uncompetitively high margin...
Ways to use BE to help customers
Customer
Need
Ideal
Outcome
Bias 1
Bias 2Bias 3
Bias 4
Final advice
•  Avoid the hype, BE just helps with creating
hypotheses to test (not an exact science).
•  Research is not ...
Paul Laughlin
Independent Consultant
Email: laughlin.consultancy@icloud.com
Twitter: @LaughlinPaul
LinkedIn: https://www.l...
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Behavioural economics presentation for Chartered Insurance Institute

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An introductory presentation on Behavioural Economics which I have presented at CII events around the UK. Just a taster on the subject to help Insurers understand the need to consider implications for their product manufacture, sales & marketing.

Published in: Business, Economy & Finance
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Behavioural economics presentation for Chartered Insurance Institute

  1. 1. Behavioural Economics: What is it and what does it mean for the Insurance profession? Paul Laughlin (former Head of Customer Insights, Lloyds Banking Group Insurance & Scottish Widows)
  2. 2. How we really make decisions Would you rather… A B Take a 50% chance of gaining £1,000 and a 50% chance of gaining nothing? OR Gain £500 for certain?
  3. 3. How we really make decisions Would you rather… A B Take a 50% chance of losing £1,000 and a 50% chance of losing nothing? OR Lose £500 for certain?
  4. 4. Behavioural Economics (BE) Two modes of thought: Intuition (fast, automatic, effortless, associative, difficult to control/modify) Reasoning (slow, controlled, demanding, serial, rule governed, flexible)
  5. 5. 10 BE biases highlighted by FCA
  6. 6. Present Bias
  7. 7. Reference Dependence and Loss Aversion
  8. 8. Emotional Drivers
  9. 9. Overconfidence
  10. 10. Overextrapolation
  11. 11. Projection Bias
  12. 12. Framing, Salience and Limited Attention
  13. 13. Mental Accounting and Narrow Framing
  14. 14. Decision Making Rules of Thumb
  15. 15. Persuasion and Social Influence
  16. 16. Relevance to the Insurance industry Insurance customers particularly likely to suffer from BE biases when making insurance decisions because: •  Most consumers find insurance products complex & boring; •  Many insurance product decisions require assessing risk and uncertainty; •  Insurance decisions often require trade-offs between the present and the future; •  Many insurance decisions are emotional (inc. role of fear); •  It can be difficult for consumers to learn about insurance products, due to infrequent interactions and long delay before or no experience or the risk being mitigated.
  17. 17. Potential for Good or Evil “Firms play a crucial role in shaping consumer choices through product design, marketing and the sales process. Much consumer detriment arises as firms design and sell products that benefit from consumers not overcoming mistakes or, at times, exacerbating mistakes”. FCA Occasional Paper 1
  18. 18. Examples of the Dark Side FCA have stated they will use these as early warnings: 1.  Rip-offs: Uncompetitively high margins; 2.  Suckers: Concentrated profits in small customer group; 3.  Bargains: Innovative products that appear very cheap; 4.  Traps: Contract features that often target BE biases; 5.  Regret: Reported or potential regret; 6.  Folly: Choices out of line with common sense; 7.  Confusion: Observed or likely confusion.
  19. 19. Ways to use BE to help customers Customer Need Ideal Outcome Bias 1 Bias 2Bias 3 Bias 4
  20. 20. Final advice •  Avoid the hype, BE just helps with creating hypotheses to test (not an exact science). •  Research is not dead, perception matters, eye tracking & considering biases already best practice. •  FCA BE team understand this field well and are keen to work with providers to test how to deliver better customer outcomes.
  21. 21. Paul Laughlin Independent Consultant Email: laughlin.consultancy@icloud.com Twitter: @LaughlinPaul LinkedIn: https://www.linkedin.com/in/paullaughlin Any questions?

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