The Counterintuitive Psychology of Insurance | Orit Tykocinski | TED

Transcriber:

Hello, everyone.

My name is Orit, yes.

And I study insurance.

Telling people that you study insurance is not a good way to start a conversation.

In fact, if ever you need to end the conversation,

try it, tell people you study insurance.

People don't want to talk about insurance.

They don't think it's all that exciting.

But I disagree.

I find insurance fascinating; in fact, I find it magical.

And today, I'd like to show you why.

Now, the famous author Franz Kafka

used to work for an insurance company in Prague.

And this is what Kafka had to say about insurance.

He said, "Insurance is like a religion.

Insurance is like a primitive religion.

It's the religion of people who believe that by having insurance,

they can ward off evil."

So according to Kafka,

what leads us to buy insurance is not rational thinking,

but magical thinking.

It's the belief that if I have insurance,

somehow, magically, those negative events that I fear in the future,

they're not going to happen.

Of course, this is totally irrational.

It's like believing that if you have an umbrella,

it's not going to rain.

If your car gets stolen, yes,

the insurance company will cushion the blow.

With the compensation money,

you could probably afford a new car.

But the fact that you have insurance

does not make your car less likely to be stolen.

The risk is the same whether you are insured or not.

So are people this naive?

Do they really believe that if they have insurance,

they are less at risk?

Yes.

Perhaps not consciously, but they do.

Let me show you.

In one of my studies,

I asked people to predict what is the likelihood

that in the future they will suffer all kinds of medical misfortunes,

yhat they will need an operation, physiotherapy or nursing care.

Another group was asked to make the same predictions,

but we first asked them,

"Do you have health insurance?"

And of course they do.

Israel has universal coverage.

Reminding people that they have health insurance

had a fascinating effect.

It made them feel less at risk.

Surprisingly, the effect was not limited to medical problems.

It also made them believe that they are less likely to lose money,

and my personal favorite,

asking people in Tel Aviv if they have health insurance

made the prospect of a war in Europe seem less likely.

(Laughter)

And that's magic.

Kafka was right.

There is an interesting paradox here.

We buy insurance against those events that we fear the most.

But once we are armed with this protection measure,

we feel that we are no longer at risk somehow, magically.

And this protection effect is not unique to insurance policies.

We see it with other protection measures as well.

Let me show you.

In 2012, the citizens of Israel

were very worried about a possible military attack by Iran.

And the government was distributing gas masks to all the citizens.

At the time, we called people and asked them to predict

what are the chances that Iran would attack Israel

with weapons of mass destruction?

The ratings were quite high.

People were worried.

But if we first asked them, "Do you have a gas mask?"

then the ratings dropped dramatically.

And that's magic.

Apart from the fact that gas masks are largely useless

against weapons of mass destruction,

the fact that you have a gas mask is unlikely to affect the strategic

or the tactical decision of a foreign power.

We have to remember,

insurance is an antidote, it's not a vaccine.

It doesn’t ward off evil;

it doesn't eliminate the risks that we face.

However, when it comes to insurance,

the distinction between an antidote and a vaccine

somehow gets blurred in our minds.

Why does it happen?

It happens because people are not that good

at assessing risks rationally.

Let me give you an example.

When I arranged my flight to come here,

I had to decide if I wanted to buy travel insurance.

Rationally, I should have based this decision on several considerations:

the price of the policy, of course,

the value of my luggage,

the aggravation that I'm likely to experience

if my luggage gets lost.

And of course, the likelihood of such an event, right?

But most of the time, we're just too busy to make such rational calculations.

And anyway,

I doubt that Lufthansa are very keen to share their damage statistics with me.

So what do we do instead?

We rely on our intuition.

So how do we evaluate risks intuitively?

We start by imagining the outcomes that we fear.

So here I am,

it's late at night, I'm sitting at this airport,

all the other passengers already collected their luggage and left.

I realize that my own suitcase is now probably heading to the North Pole.

Thinking about this scenario creates anxiety,

and then we use the level of anxiety that we feel

in order to assess the probability.

So if I'm feeling terrified,

I will infer that the risk of such an event is quite high.

But you see, this is an intuitive risk estimate.

It is entirely psychological and emotion-based,

which is why it is also highly susceptible to the magic of insurance.

Insurance reduces our anxiety.

First, because the outcomes that we imagine are suddenly less grim.

Yes, I'm sitting at the airport, yes, it's late at night,

all the other passengers had left,

but there will be this guy there, they would give me a voucher,

eventually, I will get compensated, it's OK.

Also, because we are conditioned to associate insurance with safety,

security, tranquility and peace of mind.

And if I'm feeling less anxious,

I would infer that the risk is not that high.

So there you have it.

I have insurance, and the risk is gone.

But why do we associate insurance with peace of mind?

Well, first, in many languages,

this is exactly what the word "insurance" means.

It comes from the word "sure," which means lack of doubts,

no unknowns that would sneak up and bite you in the future, right?

But also because traditionally,

this is how insurance was promoted.

Let me show you an example.

This is a lovely advertising toy

that was distributed to visitors at the British exhibition in 1924.

So you see this guy and he looks terrified.

He is barraged by the bricks of doom,

fire, accident, falling on his head.

And the tag on the bottom,

it reads "anxiety," which perfectly describes the guy's expression.

But if you pull on that tag,

something slides inside, and the guy transforms.

First, he now has the protection of the Prudential insurance helmet,

and his expression is changed into a smile.

You know why?

Because Prudential insurance dispels anxiety.

Modern images of insurance convey the same message.

Insurance logos often incorporate supporting hand below,

and umbrellas above, ultimate protection.

And then travel insurance ads.

They could easily be mistaken for vacation brochures, right?

Romantic couples, exotic islands, palm trees.

And if for some reason you need images of smiling,

happy people wearing white,

do an image Google search with the words "pension plans"

or "health insurance."

Insurance ads rarely show you sick people, smashed cars, torn suitcase.

The message is loud and clear:

You have insurance,

all is well in the world.

However, to get us to buy insurance,

the promoters must also work our fears.

Which is why, right after you paid a lot of money

for a top of the line refrigerator,

the same seller who, just moments ago,

were explaining how reliable this product is,

is now telling you that it may break down at any moment,

which is why you should buy the extended warranty.

And with some credit cards, you could get free travel insurance.

All you need to do is to call the agent.

But when you make this call,

you are told, yeah, but the free deal is only for the basic plan.

Basic plan doesn't sound good already, right?

And then you get to hear a list of things that you are not covered against,

like fires and heart transplant and floods, etc.

But if you pay one more dollar a day, right?

And your active imagination does the rest,

with each item on the list, your anxiety is mounting,

and you don't ask yourself, "Hey, I'm going to Paris,

why would I care about a tsunami?"

You pay the dollar, and all is well in the world again.

In fact,

just realizing that we are not covered against something

is enough to distort our perception of risk.

I once asked people to imagine, in one of my studies,

that they're going to go on a trip

and they plan to buy travel insurance at the airport.

But by the time they reach the counter,

boarding had already started,

and they have to board that airplane painfully aware that they are not covered.

And then I asked them to assess all kinds of travel-related risks.

And these were dramatically inflated,

compared to the ratings of people who did have insurance.

For example, lost luggage,

the risk of lost luggage, almost 50 percent.

What are the chances that you will need hospitalization?

Almost 45 percent, well, 45 percent.

And how about, you will need to be rescued?

Thirty-one percent.

I remember the first time I saw this data, I was speechless.

I was thinking,

"Guys, if this is what you believe, why would you ever leave home"

you know?

(Laughter)

Yeah.

Boarding an airplane with no insurance is tempting fate.

It's like realizing that your insurance policy had just expired

and not renewing it?

Grave danger, indeed.

Your appliances, they know, you know.

So we buy insurance and restore our peace of mind.

And now you're probably asking yourself,

"But peace of mind is good.

What's wrong with peace of mind," right?

"What's the problem?"

The problem is that we are highly likely to be over-insured.

What does it mean?

Well, first,

we may be protecting ourselves against really unlikely events

like a tsunami in Paris.

Or we may be paying a lot to prevent a trivial loss.

Does it really make sense to extend the warranty on an old washing machine?

And if you will examine your own policies back at home,

many of you will find that you have redundant coverage.

You are paying several policies on the same event.

Many of you do that.

Me included, and I should know better.

So ...

This kind of behavior can get people in debt,

and even if they don't,

this is money that we could spend in far more pleasurable ways, right?

At least I can.

But selling peace of mind is a problem for the insurance companies as well.

Why?

The insurance companies are well aware of the problem called “moral hazard”.

You see, when people are insured,

they become negligent.

They start leaving their valuables out in the open.

They don't check their fire alarms, they drive faster.

In short, they act in ways which put them at greater risk.

Now, the insurance companies,

they believe that we behave like that

because we know that if something happens,

someone else will pay.

Which is why many policies include deductibles.

That's the money that comes out of your pocket, right?

So the deductibles are there to make sure

that some of the risk will stay with the client.

But based on the research that I just shared with you,

it is entirely possible

that the reason that we are careless

is not just that we think that someone else will pay,

but it's also the magical belief that if I have insurance,

it's not going to rain.

The damage is not going to happen,

and magical thinking is not susceptible to deductibles.

What are the lessons to be learned?

For us, for you?

Next time you consider buying insurance,

remember Kafka.

Ask yourself:

Am I buying insurance for the right reasons?

Am I making a sound economic decision

or merely trying to please my psyche?

As for the insurance companies,

I hope they will consider changing their message.

Don't sell magical happiness.

Encourage us to buy insurance when it is economically rational

and the responsible thing to do.

And finally,

guys, I hope that next time someone says "I study insurance,"

you would say, "Wonderful.

Please tell me more."

Thank you.

(Applause)