For Seinfeld fans. George Costanza once famously (infamously?) quoted, “Worlds are colliding!”. In my work life, this is happening, without the negative connotation. As a credentialed actuary, I have a heavy interest in behavioral economics. I have always had an interest in why people do things.
Going back 20+ years, when I was in college trying to determine a worthwhile major, I was deciding between actuarial science and marketing backed with psychology. Little did I know that the two would collide, with behavioral economics now being a component of business decisions outside of marketing—particularly in HR and benefits.
In a perfect world, individuals would be rational, forward-looking consumers. They would make optimal choices creating the best outcomes. However, heuristics and biases hinder our rational thinking. Heuristics are rules of thumb we follow or mental shortcuts we take. I’ve provided the definition of some of the heuristics and biases, along with workplace examples.
Prefers immediate costs or benefits to those that would occur in the future (i.e., $100 now is better than $110 next year).
A tendency to have stronger feelings about the chance of loss than the possibility of gain.
A preference for things to remain the same (inertia).
Behavioral expectations or rules within a society or group of people.
Occurs when people are influenced by peers or society to adopt behaviors.
Choosing a health plan exhibits many biases. About ten years ago it was popular for companies to offer their employees multiple health benefit plans. On the surface this seemed like a nice offering. Employees could choose from an HMO plan, an EPO plan, or a low and high deductible PPO plan. This trend faded relatively quickly though.
Multiple behavioral ideas are in effect here. People who face complex choices make poor decisions, causing them to have trouble choosing the optimal health plan. As a result, I have designed tools to help employees select the optimal plans for them and their families.
“People who face complex choices make poor decisions, causing them to have trouble choosing the optimal health plan.” – Brandon Conroy, Innovu Practice Director, Retirement Analytics
People tend to stay with their previous selection when faced with multiple options—the status quo bias. Therefore, default options were introduced into the HR world. The default option is also looked at as part of the nudge phenomenon. The economist Richard Thaler, who won the Nobel Prize for his work in behavioral economics, has written about the nudge movement.
Individuals also make systematic mistakes in assessing probabilities, giving too much weight to extremely low probability events, such as dying in a plane crash. This mental shortcut causes us to over insure, landing in the HMO that is more expensive than other more favorable options.
Individuals also make systematic mistakes in assessing probabilities, giving too much weight to extremely low probability events, such as dying in a plane crash.
The real-life situation that most exemplifies the power of the default option is captured in the graph below. It shows the percentage of people willing to donate their organs after death. The gold bars represent countries who allow individuals to opt in if they want to donate their organs. The blue bars represent countries that have consent as the default option.
While heuristics and biases are okay in every-day situations, they are detrimental when making more complex decisions. Employers need to help employees use cognitive decision-making when choosing health plans and funding their retirement. If you don’t give them the tools and support they need to make cognitive decisions, you could be increasing your costs and risk.
In Part 2 of my blog, I will discuss more behavioral influences and their impact on benefit design.