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Behavioural economics is one of the most interesting fields for understanding how customers make decisions. Its insights are often counterintuitive and offer real practical insights for businesses — including insurers — when designing and implementing new customer propositions.

At RightIndem, we believe putting the customer at the heart of the claim is essential for achieving the twin goals of digital adoption and happier customers. The company was born from a conversation about how we could use technology to support the needs of insurance claims customers as revealed by psychology insights. Our development and product team have eCommerce backgrounds because it is often retailers that have led the way in designing customer journeys with a deep understanding of how people make buying decisions in mind.

So far it’s working; one insurer used our Total Loss module to explain what informs a settlement offer saw to an 80 per cent increase in the settlement being accepted without conflict by customers, and a big jump in net promoter score based on how the claim was handled.

In this area of rich insight, we asked Hayley Geary, a behavioural economist at the London School of Economics for a primer on the five most useful theories in the field.

1. Embodied Cognition

Most of our behaviour is a direct result of us wanting to perform an action. We think and our body does. We are also consciously aware that different things in our environment influence us. Think about the last time you were peer-pressured to ‘stay for just one more drink’, even though you didn’t really want to.

Embodied Cognition, a popular topic in behavioural economics concerns itself with the reverse — the environment influences our opinions and in turn behaviour without us realising. Trivial things like the weight of an object can influence our views of people we have never met.

For instance, in one experiment researchers approached people on the street and asked them to evaluate the CV of someone they had never met. Some people were given heavy clipboards and some people were given light clipboards to hold whilst doing this task. Despite identical CVs, those with the heavy clipboard rated the candidate as being more serious and more employable and those with light clipboards as more likeable but less employable. This shows that we don’t always know what makes us act in the ways we do.¹

2. Bounded Rationality

In our modern consumer world, lots of choices is the norm. From choosing cereal to deciding how we get to work, most decisions we make on a day-to-day basis require us to consider dozens of options, each with pros and cons that we value differently. Usually, there is no objectively right answer. So, how do we make the right decisions quickly?

We can’t make fast decisions when considering all possible options as we have limited time and cognitive resources — or in behavioural economic terms, we have Bounded Rationality. Researchers have shown that too much choice is overwhelming and ultimately leads us to make no choice at all.


Psychologists Iyengar and Lepper conducted an experiment in which six jars of jam were available to sample on one table at a grocery store and 24 on another. The table with six jars led to 30 per cent of ‘tasters’ buying jam whereas only three per cent purchased jam when given 24 options. This effect can have serious consequences for both organisations and consumers. Organisations can miss opportunities to provide services and individuals may suffer as a result.²

3. Framing and Anchoring

To prevent us from spending all of our waking hours making fairly meaningless decisions, evolution provided us with a set of handy tools. In behavioural economics, these are called heuristics and biases; mental short-cuts, which force us into making automatic decisions when we are uncertain about a choice.

One bias we use to make decisions is Framing. This is when a choice is influenced and changed on the basis of how identical information is presented. A simple example of this can be seen in product advertising. More people are likely to choose a toothpaste recommended by four out of five dentists rather than one not recommended by one out of five. This seems obvious but the same information presented differently can completely reverse preferences.

Framing isn’t the only heuristic that can significantly bias our decision making. Behavioural economists Kahneman and Tversky demonstrated another cognitive bias called Anchoring. This influences our perceptions of pricing as we heavily rely on the first piece of information we are presented with that is relevant to the product. In one experiment Kahneman and Tversky asked two sets of participants to estimate the sum of a set of numbers in five seconds. The first group was given 1x2x3x4x5x6x7x8 and the second was given 8x7x6x5x4x3x2x1. Group one estimated 512 and group two estimated 2,250.³ This effect is shown to have impacts within the insurance industry, possibly explaining why people make worse decisions when buying add on products.⁴

4. Mental Accounting

Much like the ways in which organisations budget and allocate money to different departments, we also mentally separate our money and place it into different ‘accounts’. This is aptly called Mental Accounting, which we unconsciously use to keep track of, organise and evaluate our purchasing decisions.

Thaler, a Nobel Laureate, investigated this effect in a cinema. He gave participants this scenario — Imaging you pre-purchase a £10 ticket. Once you get to the cinema you realise the ticket must have fallen out of your pocket. Would you buy another ticket? — 46 per cent said yes. He then proposed another scenario — Imagine you see a film that costs £10. At the ticket counter, you realise that you have lost a £10 note. Would you still pay £10 for a ticket? — 88 per cent of people said yes.

Why this dramatic shift in preference? In the first scenario, if a second ticket is purchased, we view the film as costing £20. In the second, we view the movie as only costing £10. Even though both scenarios cost £20 in the end, we treat them differently as the money comes from different mental accounts. The money in scenario one comes from the same account whereas in scenario two it comes from different accounts.⁵

5. Hyperbolic Discounting

Most of us are aware that drinking every day, smoking and neglecting your gym membership can have serious health consequences. We all frequently engage in behaviours that can harm our health. Just think about how much junk food you consume over the course of a week or month when you should be eating your veggies.

Behavioural economics has a theory to explain this — Hyperbolic Discounting. Beyond the name, the theory is simple. We value immediate satisfaction over long term consequences. When we eat a doughnut, we don’t immediately gain weight so we repeat this behaviour. We also value immediate gain over long-term gain even if the gain in the future is higher.

This relates to delayed gratification. In the 1960s, researchers at Stanford conducted a series of experiments now famously known as ‘The Marshmallow Test’. Children were presented with a marshmallow and were told if they waited before they ate it, they could have another. Not surprisingly most didn’t wait.⁵ This is also found in adults when offered money they could take now or more they could have in a week.⁶

Read on:

1. Ackerman, J. M., Nocera, C. C., & Bargh, J. A. (2010). Incidental haptic sensations influence social judgments and decisions. Science, 328(5986), 1712–1715.

2. Iyengar, S. S., & Lepper, M. R. (2000). When choice is demotivating: Can one desire too much of a good thing?. Journal of personality and social psychology, 79(6), 995.

3. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. science, 185(4157), 1124–1131.

4. Shapira, Z., & Venezia, I. (2008). On the preference for full-coverage policies: Why do people buy too much insurance?. Journal of Economic Psychology, 29(5), 747–761.

5. Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral decision making, 12(3), 183–206.

6. Mischel, W. (2014). The marshmallow test: understanding self-control and how to master it. Random House.

Rubinstein, A. (2003). “Economics and psychology”? The case of hyperbolic discounting. International Economic Review, 44(4), 1207–1216.