There are many choices to make when trying to decide what insurance you need. When faced with an abundance of choice, people tend to either maximise or satisfice (according to Herbert Simon, a psychologist in 1950s)—both of which have their pitfalls.
Maximisers tend to want to be sure that their purchase was the best out of all choices available to them, which leads them to consider all the possible alternatives available. This is a very stressful task, given that we have so many options to choose from in our modern lives as well as limited time to do so. It has been shown that too much choice leads to depression and loneliness, which then is likely to lead to people not considering all their options fully.
An alternative approach is to satisfice, which means that you may have certain criteria for making a decision but that you do not try to find the best out of all possible options and just focus on the choice that is good enough. It has been shown by research that when only a few choices are made available to customers, sales will be boosted.
Although satisficing seems to be the optimal technique for making a decision about the preferred type of insurance, it does lead people to make mental shortcuts, which are not always optimal. Below are 5 mental shortcuts (also known as "heuristics") we should be aware of when making choices about what the best insurance is:
How Satisficing Leads to Mental Shortcuts
Anchoring and adjustment
This is when we estimate a number (e.g., the cost of insurance) by starting from an initial amount ("the anchor") and adjusting up or down. The reason this shortcut can lead to less than great results is that different starting values lead to different estimates.
For instance, the anchor could be the price paid in previous year and the renewal quote might be adjusted down (as people think that they deserve reduced price for loyalty with the company).
This shortcut occurs when people assess how likely something is depending on how easily they can bring it to mind. For instance, people think that airplane crashes are more common than car crashes (this is not the case). This is because airplane crashes are given more vibrant news coverage so people can remember examples of airplane crashes more easily.
For example, if a handyman would like to insure their growing business, they could have heard a lot about public liability insurance, which was advertised on television a lot recently, but not as much about employer's liability insurance, which is not mentioned as much in TV adverts—although both insurance types are highly important.
When using this mental shortcut, people tend to make a decision by comparing the present situation to their prototype. For instance, when trying to decide if a person is trustworthy, you might compare aspects of their personality to other examples you hold. Therefore, if someone’s personality reminds you of your parents, then you are more likely to find them trustworthy, despite no actual evidence for this assumption.
For example, a gardener might choose to get insurance on their tools and van with the insurance agency where the insurance agent reminds them of a trusted friend (e.g., looks or sounds like them), as opposed to where the insurance agent seems totally unfamiliar.
This is when people make choices based on their current emotions. For instance, when you feel low, you may buy more. Also, research has shown that when people feel happy, they are more likely to think of their decisions as being beneficial and low risk. Therefore, it is important to be aware of your mood and its effects when trying to choose the best insurance for your company.
For instance, if someone insures their home in a good mood when the weather is great and after they’ve had a nice lunch, it might seem like a great idea to sign up to all the optional extras that they may not necessarily need—for instance, personal possessions cover if you don’t have very expensive possessions.
People tend to think something is more valuable if it is scarce and low value if it is readily available. For example, this is one reason why diamonds are more valuable than rocks. This shortcut comes from the idea that if something is not easily available then it was harder to acquire. Also, people tend to think that if a product is running out then it must be amazing as everyone else is buying it.
This trick can be used in marketing campaigns by making a certain deal seem scarce and exclusive. An example of this in insurance could be someone feeling that they should commit to buying a life insurance cover straight away without considering other options as the online advert stated that the sale for this particular insurance company ends that day.
When you're buying your next insurance policy, keep these shortcuts in mind. Being aware of them can help direct you towards making a better decision.