Insurance is all about assessing risk. So isn’t it important to consider how we, as human beings, approach decision making? After all, a vast majority of risks arise directly from human behaviour.
Understanding how and why people make decisions can give you a powerful insight into how hazards develop, helping to prevent them. In order to anticipate risk intelligently, you must first have an accurate understanding of human behaviour.
Unfortunately, human behaviour is unreliable. According to the traditionalists, we are all rational, self-interested individuals who logically seek to maximise our gains and minimise our losses. This simplistic definition allows economists and politicians to build models of human behaviour, but they don’t have much success in real world scenarios.
A close look at our own experiences quickly reveals that this is an illusion. We make decisions based on irrational or emotional reasoning, not just rationality. While we think we make decisions by ourselves, social influences are often much more powerful than individual thought. Habit, the comforting reliance on what we’ve done before, allows us to bypass rational decision making and stick to what we know.
For example, some people fail to acknowledge unlikely but potentially severe risks, simply because it’s never happened to them before. This isn’t very rational, but it’s an accurate description of how millions of people form decisions.
But there are mitigating factors to this irrationality. When making a decision, very rarely do we have access to perfect information. In such circumstances, basing your behaviour on what’s worked in the past, or on what’s popular among others, makes sense.
This has significant implications for the insurance industry. To cultivate a truly proactive safety culture - and thus intelligently minimise the likelihood of risk - an understanding of real world human behaviour is crucial.
This irrational side of human nature influences how and why people buy insurance. Behavioural biases can lead people and organisations to make poor decisions when choosing whether or not to purchase cover. An over reliance on past experiences can blind them to risks.
If we’re serious about understanding risk, we must face the puzzle of human irrationality. Given its obvious influence, it’s the rational thing to do.
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Risk Management Partners Limited is authorised and regulated
by the Financial Conduct Authority.
Registered office: The Walbrook Building 25 Walbrook, London EC4N 8AW.
Registered in England and Wales. Company no. 2989025.