As a teenager, I had a love-hate relationship with horror flicks. I loved watching them with my friends and feeling deliciously frightened in a crowded theater. I hated driving home alone in the dark to my parents' house afterwards. I was always certain that Freddy Krueger or Ghostface or the "Jeepers Creepers" monster was just waiting for me in the back seat of my car, and I would eventually become the fodder of a horror film "based on true events" that would frighten teenagers in years to come.
So, in order to keep my panic in check, I came up with an ingenious superstition — I convinced myself that Freddy couldn't attack me as long as I never looked to see if he was there. So, other than checking my mirrors to change lanes, I studiously avoided looking behind me during my entire drive home. Because the moment I checked to see if there was a monster, it would be there. I had to trust that I was safe.
Believe it or not, this completely irrational habit of mine has a great deal to do with how we all go about buying insurance. We may become wiser and more mature than our teenaged selves (and you might have already been there as a teenager compared to me), but we cannot get past the irrational parts of our brains that lead us to strange and stupid behavior.
Here's what you need to know about why purchasing insurance coverage is not nearly the straightforward, risk-mitigating, and mature course of action that you may think it is.
Part of Us Thinks That Insurance Is Magic
After you complete the process of purchasing life insurance; umbrella insurance; or earthquake, flood, or fire insurance, how do you feel? You might feel a little more financially secure, knowing that you'll be covered in case of an issue. You might be relieved to be finished with an unpleasant but important task.
But most likely, you'll also stop worrying about the likelihood of whatever you're now insured against. Not because you're financially covered now — but because some superstitious part of you feels like having the insurance is a guard against that specific bad event occurring.
Before you scoff, think about how much better you'd feel about doing something dangerous if you purchased life insurance ahead of time. Wouldn't you be more likely to accept the opportunity to go bungee jumping or white-water rafting if you got a chance to buy insurance coverage at the same time?
This sense of insurance providing a kind of shield has become prevalent among leisure travelers, particularly since 9/11. According to John Tierney of The New York Times,
[in 2007], tens of millions of people bought life insurance for scheduled flights of airlines in the United States. Not one of those insured passengers died in a crash — and this was not just a coincidence, at least not to many of the people who bought the insurance. No, at some level they believed that their insurance helped keep the plane aloft, according to psychologists with new experimental evidence of just how weirdly superstitious people can be.
We may understand on a rational level that purchasing insurance will have absolutely no effect on a plane's ability to safely reach our destination, but that does not keep our gut from feeling a little better about traveling once we have insurance.
Tierney goes on to show that this magical thinking about insurance is not limited to potentially devastating incidents. After all, we can be forgiven for being irrational about plane crashes and terrorism. However, apparently we even assign magical properties to insurance when the stakes are a great deal lower:
In one…experiment [by Orit Tykocinski, a professor of psychology at the Interdisciplinary Center Herzliya in Israel], players drew colored balls out of an urn and lost all their money if they picked a blue one. Some players were randomly forced to buy insurance policies that let them keep half their money if they drew a blue one. These policies didn't diminish their risk of drawing a blue ball — but the insured players rated their risk lower than the uninsured players rated theirs.
The problem with this particular aspect of our superstitious brains is that it is very difficult to counteract. We have difficulty thinking rationally about loss, whether it is loss of money, property, or life and limb. Basically, there's not a great deal we can do in order to turn off the sense that insurance is protective, rather than just compensation. So, if purchasing insurance will make you feel better, taking steps to make certain you are buying a legitimate policy (and avoiding volcano insurance salesmen) is the most rational thing you can do with your superstition.
Our Brains Are Like Google
The other aspect of our irrational brains that throws us off course when purchasing insurance is something behavioral economists call the availability heuristic. This cognitive bias works like this — if you are able to easily recall something that happened, then your brain assigns it more likelihood. In the same way that the top hits for Google searches are considered the most "important" hits according to Google's ranking and algorithms, our brains seem to think anything we can recall in detail must be more important than other information — like statistics, scientific evidence, etc.
The availability heuristic was a big part of the reason why I would be freaked out about the possibility of being attacked by Ghostface immediately after watching "Scream." What the killer did in the film was fresh in my mind, so it seemed more likely to happen. By the next day, I could laugh about my paranoia of the night before, but it was next to impossible to ignore my fear at the time.
We're all victims of the availability heuristic. Any time you find yourself thinking that it's not safe to let children play outside by themselves these days, you are relying on a mental shortcut that makes it easy to recall kidnapped children but difficult to remember the crime statistics that show today's kids are the safest that have ever lived. (Really, they are.)
As much as the availability heuristic steers us wrong these days, it was an important method for gauging risk for our ancestors, long before the invention of statistical analysis. According Daniel Gardner, author of "The Science of Fear,"
As a rule of thumb for hunter-gatherers walking the African savannah, the Example Rule [availability heuristic] makes good sense. That's because the brain culls low-priority memories: If time passes and a memory isn't used, it is likely to fade. So if you have to think hard to remember that, yes, there was a time when someone got sick after drinking from that pond, chances are it happened quite a while ago and a similar incident hasn't happened since — making it reasonable to conclude that the water in the pond is safe to drink. But if you instantly recall an example of someone drinking that water and turning green, then it likely happened recently and you should find somewhere else to get a drink (48).
Unfortunately, our brains haven't caught up with our global 24-hour news culture, which means that something unusual that happened on the other side of the world is enough to make us irrationally think that extraordinary event is likely to happen to us. (Just look to see how many people are concerned about meteor insurance after Russia's meteor hit earlier this month to see what I mean.)
What this means specifically for insurance is that people are much more likely to purchase policies immediately after a loss. Whether it's seeing a relative die, seeing your house damaged by an earthquake or a flood, or even seeing a friend get sued for an injury sustained on her backyard trampoline, you're much more likely to seek out an insurance agent and get yourself covered when such an incident is fresh in your mind.
This is only a problem in that the level of fear and concern you feel fades over time. That means you're more likely to let your policy lapse. You mean to keep on top of it, but everything's copacetic right now, so insuring against something like that is not a big worry.
This is particularly troubling when it comes to the sorts of events that become more likely the more time goes on. For instance, the weeks after an earthquake are when you are least likely to experience another quake — and yet that is when people are most likely to purchase earthquake insurance. Areas on fault lines have more likelihood of experiencing an earthquake after some time has passed since the last one, but because of the availability heuristic, many of those policyholders are allowing their insurance to lapse and simply aren't worrying about the next quake.
Being a Rational Policyholder
Unfortunately, the only way to combat superstition and the availability heuristic when it comes to rationally purchasing insurance is to sit down and do an actual cost-benefit analysis with a look at the statistical analyses. (Sounds like a barrel of laughs, no?) But without countering your irrational impulses with hard numbers and science, you're likely to be purchasing policies you might not need at the wrong times — and forgetting about them as the need grows.
That's almost as crazy as refusing to look behind you for fear of being attacked by Freddy.
source: wisebread.com
