How rational ignorance might explain why toilet paper trumps life insurance

Would you want to know if your colleagues view you as incompetent?

A recent study by Tali Sharot, Professor at the Department of Experimental Psychology, University College London (UCL) asked, Would you want to know if your colleagues view you as incompetent? .. the result was 55% wanted to know if their colleagues had a negative opinion of them. When the same group was asked the opposite question.. Would you want to know if your colleagues view you as competent?.. the answer was 80% wanted to know if their colleagues had a positive opinion of them.

Intuitively the result that more people prefer to know if they are judged as competent (80%) rather than incompetent (55%) is not surprising but it is kind of illogical… Dan Ariely coined the term predictably irrational to describe such outcomes.

The fact that your colleagues think that you are competent might put a temporary spring in your step but it’s not very useful. However the information that you are viewed as incompetent is potentially much more useful. It could lead to productive long term, attitude/behavioral changes that might save your career.

The results of this UCL survey is a classic example of our natural propensity to turn a blind eye to really ‘useful’ information especially if the information is cloaked with some bad news. I learnt about this survey from a webinar hosted by Chief Behavioral Scientist, Matt Battersby. Another gem presented by Matt was his observation that the recent mandatory publication of calories on American menus (for chain restaurants with 20+ locations) is likely to have no effect or could even have unintended consequences.

Super Size Me

What could these unintended consequences be? Customers might figure out that it’s better value for money to order a 1,000+ calorie hamburger rather than a vegan salad that results in hunger growlies in less than an hour … more bang for your buck. For those dedicated comfort food aficionados, the calorie count is unlikely to sway their predilection, but the new information might leave them slightly depressed after their meal. Is this calorie counter simply converting us from a nation of ‘happy’ burger eaters to ‘sad’ burger eaters?

Our reluctance to receive feedback from work colleagues and glossing over dietary information are indications that our relationship with data might be more complicated than we imagine.

Rational Ignorance is all around

In the recent municipal elections in Sao Paulo, I was easily swayed to vote for an unknown candidate associated with a minor political party without doing any research on the aspiring council member. Brazil is one of the few countries in the world where voting in government elections is mandatory. The Brazilian political landscape is truly byzantine with the upper house having representatives from 16 political parties, the lower house having representatives from 24 parties and the Brazilian President currently having no political party affiliation. A political junkie friend of mine explained to me that my apathy in local municipal Brazilian elections was a typical example of ‘rational ignorance’.

The definition of rational ignorance is refraining from acquiring knowledge when the supposed cost of educating oneself on an issue exceeds the expected potential benefit that the knowledge would provide. The term rational ignorance is associated but is not exclusive to the realm of politics. This does not mean that voters make poor and biased decisions. Many people do not have the time to devote to researching every aspect of a candidate’s policies. So many people find themselves blindly following social media posts from political pundits who are seemingly more versed in the subject. For me, my friend’s suggestion for the Sao Paulo city council candidate saved me the effort of having to undertake a study of 33 Brazilian political manifestos and their corresponding candidates.

Behavioural Economics makes reference to heuristics as being a driving force behind our decision making process. A heuristic is a rule or method that helps you solve problems faster than you would if you did all the computing. It sounds fancy, but let’s consider a simple example of a heuristic. How does our brain react when we are shown pictures of i) a long multiplication or ii) an angry man. You might take a couple of minutes to solve the former but the latter will immediately trigger a fight or flight subconscious reaction; our brains have evolved over time to develop ‘heuristics’ to instantly recognize an angry face as dangerous which has the objective of extending our life expectancy. Might it be that we are treating social media as a heuristic believing that they help us navigate complicated political, economic and scientific commentaries? Netflix’s The Social Dilemma & the Great Hack go into depth on how social media’s design can manipulate the news and politics, stoke conspiracy theories and leave us less informed, misinformed and irrationally biased.

If we have this tendency to hide behind rational ignorance regarding our politics, I have no doubt that rational ignorance leads to our superficial understanding of personal taxes, diet and exercise, health issues (including reducing the risk of covid-19) and personal investments.. including insurance; to name a few.

Insurance product offerings and contract wording: mind the gap

The term ‘protection gap’ is defined as — ‘The shortfall in the amount of life insurance cover necessary to maintain the current living standards of dependents’. Life insurance companies’ spend an extraordinary amount of effort trying to help the underinsured get better protected. Might it be that insurance companies are not addressing the key issue which leads to our lack of enthusiasm to buy their products?

Insurance products and contracts are not consumer friendly and to the average person, they are not even written in English. Insurance is thus fertile ground for the manifestation of rational ignorance within the universe of potential insurance clients. I pity the potential client when he is researching options such as pure protection, accumulation, critical illness, disability, long term care etc..

Financial education is certainly a key to confronting this barrier. The good news is that we have lots of options from traditional TV, radio and newspapers to new media like…podcasts, youtube videos, blogs etc… the bad news is that we have lots of options; too much information will lead to even more confusion. Focus will be the key to successful financial education.

Lemonade Insurance and many other insurtech startups are certainly addressing some of these obstacles by offering quick transactions, clear policy language and reinventing the concept of expedient claims processing. I would argue that these start ups’ limited product coverages can at best be considered as tiny steps; albeit in the right direction.

Toilet paper trumps life insurance

You would have thought that covid-19 might have placed life insurance ahead of toilet paper on the list of most desired items to buy during a pandemic. I’m sure that life insurance sales executives are still scratching their heads wondering why ‘this once in a generation’ sales tsunami turned out to be only a ripple. It might be that rational ignorance trumped any uptick in propensity to buy life insurance.

To conclude, I would argue that the insurance industry’s acknowledgement that rational ignorance is a major sales obstacle is the first step in the process of recovering from ‘complex wording’ addiction. Given our entire industry is afflicted, the first mover advantage is still up for grabs.