Bob Thomas's talk from the UXPA 2014 Ignite session "Are you a Super Hero or a Super Villain? Using Design Psychology for Good (and Evil)." Design Psychology is a powerful tool to wield and can be used to the benefit or detriment of our users; motivating them to behave in ways that can be in their interest, or our own. Our panel of experienced professionals, each with an interest in different facets of design psychology, will choose a white hat or black hat - some taking the side of good and honest intentions, with others taking the dark side where manipulation and coercion reign. On which side will you fall?
PowerPoint Presentation
Behavioral Economics: Good and Evil Practices in the Insurance
and Financial Industries
Bob ThomasDirector of User Experience, Liberty Mutual
Insurance
(email) [email protected](twitter) @bobthomas
2014
1
Hello everyone. Im Bob Thomas, and I work for Liberty Mutual
Insurance.
Im going to talk about Behavioral economics, which applies
economics and psychology to explain the ways we make decisions. And
well look at some good and evil practices in the insurance and
financial industries along the way
Classical Economics: We Are All Rational Creatures
2014
Source: CBS. This photo is used here for personal,
non-commercial use.
2014
2
Classical economics holds that were all rational human beings,
Were all driven by self-interest and know exactly what we want, We
think about the pros and cons of everything before we buy
something.
Behavioral Economics: We Are Emotional and Irrational
2014
Source: CBS. This photo is used here for personal,
non-commercial use.
2014
3
But these assumptions break down because we dont make decisions
consciously. Were emotional. Were irrational. Think gut
reactions.
And financial and insurance companies today understand that most
users dont know the HOW and WHY behind their purchase decisions
Principles of Behavioral Economics
2014
Principle 1: Mental Shortcuts
Principle 2: Value Assessments
Principle 3: Emotional Impacts
FREE!No Annual Fee
2014
4
And this is why companies use principles of Behavioral
Economics. 3 principles Ill discuss are:Mental Shortcuts, Value
Assessment, and Emotional ImpactsAnd companies use these principles
to empower people (for good), or themselves (for evil)
Principles of Behavioral Economics
2014
Principle 1: Mental Shortcuts
Source:
http://ozeanmedia.com/wp-content/uploads/2013/05/brain_shortcuts.jpg.
This image is used here for personal, non-commercial use.
2014
5
So lets start with one principle, mental shortcuts. We make
financial decisions that require us to reconcile all sorts of
information (think retirement portfolios, or taxes, or car
insurance) Were not very good at this, which is We rely on mental
shortcuts
Mental Shortcut: Reliance on Defaults & Relative Choices
2014
People rely on defaults as complexity increases
2014
6
One Mental Shortcut is that:People rely on defaults in the face
of complexityWe dont usually override the defaults set for us Think
about setting up a 401K or retirement account do you remember the
investment choices you made? Or were they defaulted for you?
Mental Shortcut: Reliance on Defaults & Relative Choices
2014
To help consumers, this life insurance estimator includes
default values
2014
7
In the face of complexity, some companies try to help consumers.
Northwestern Mutual has a life insurance estimator that includes
defaults for those assets and expenses that are HARD to ESTIMATEAnd
this is probably Good for most people
Mental Shortcut: Reliance on Defaults & Relative Choices
2014
Relative choice: we value products based on comparisons with
other similar products
2014
8
Closely related to a reliance on defaults is the idea of
relative choiceWe value products based on comparisons with other
similar productsOffering up to 3 or 4 choices makes people feel
comfortable and in control
Mental Shortcut: Reliance on Defaults & Relative Choices
2014
Buying insurance can be very complex
Potential customers may refuse to add coverages that may benefit
them
2014
9
Buying car insurance is difficultAnd in the face of complexity,
people may refuse to add coverages that may benefit themGeico
Insurance helps by offering 4 relative choices, which makes people
feel comfortable and in controlAnd this is good
Principles of Behavioral Economics
2014
Principle 2: Value Assessments
2014
10
A second principle of Behavioral Economics involveshow we assess
value, because value is a relative conceptIn looking at the value
of a product we often use "irrational metrics to guide us,
especially if companies use a key word as a trigger
.
Value Assessment: Love of Free
2014
Free triggers consumer reactions that cause people to overlook
underlying math
2014
11
One of these irrational metrics that guide is in the wrong
direction is the love of freeFree triggers reactions different from
what we think are logical And they cause us to make impulsive
financial decisions and overlook underlying math
Value Assessment: Love of Free
2014
Most people carrying greater than $1000 in balances
instinctively select a card offering
15% APR + No Annual Fee Free = No Annual Fee(Example: $150 in
first month)
vs. 10% APR + $50 Annual Fee (Example: $100 in first month)
2014
12
For example, some people carrying greater than $1000 in debt may
opt for a credit card offering no annual fee (think free) even
though its bad math to do soAnd credit card companies take
advantage of our Love of Free. And this is evil
15% APR + No Annual Fee ($150 in first month).. So free = no
annual feevs. 10% APR + $50 Annual Fee ($100 in first month)
Value Assessment: Hyperbolic Discounting
2014
We buy or borrow now at the cost of having less money in the
future
2014
13
Another value assessment is Hyperbolic discounting.Which means
We buy or borrow now at the cost of having less money in the
future. So we discount the value of future spending. And cash
advance and loan companieswho take advantage of our need for
instant gratification are evil
Principles of Behavioral Economics
2014
Principle 3: Emotional Impacts
2014
14
A third principle of Behavioral Economics involvesEmotions we
make impulsive decisions when emotions get the better of usFor
example, we place greater psychological weight on a financial loss
than a similar financial gainSo well panic and SELL! probably at
the wrong time
.
Emotional Impact: Risk Aversion
2014
People would rather save money under the mattress than invest in
the market
2014
15
One example of this is Risk Aversion.People are willing to pay a
premium to move an outcome from highly uncertain to certain
People would rather NOT invest in the market, for fear of losing
the cash if the bank fails or the market collapses
Emotional Impact: Risk Aversion
2014
Progressive Insurance offers a Coverage Checker that highlights
areas where an individual may be buying too little (or too much)
insurance
2014
16
So to take advantage of our aversion to riskA company like
Progressive Insurance offers a Coverage Checker that highlights
areas where an individual may be buying too little (or too much)
car insuranceAnd we think this method of moving us toward safer
outcomes is good
Emotional Impact: Self-Control Facilitation
2014
We recognize the need for self-control but need support
We are often willing to accept downsides of third-party control
to achieve goals
2014
17
Our emotions drive us to make irrational purchasesWe want to
control ourselves but need support. So well accept controls that a
financial company facilitates for usFor example, well pay a fee to
a company like this one to help us counteract our impulse buying
with impulse saving
Emotional Impact: Self-Control Facilitation
2014
Insurethebox provides low-mileage car insurance. They give their
customers a free telematics device to keep track of mileage
2014
18
Another example of a 3rd-party control is Insurethebox, which
provides low-mileage insurance policies and gives drivers a device
to keep track of mileageThis motivates people to drive less,
decreasing the likelihood of an accident.And this we think is
good
In Summary: What Behavioral Economics Shows Us
We make financial decisions intuitively, and were not very good
at itIt helps to understand these principles behind our financial
decisions:Mental ShortcutsValue AssessmentsEmotional Impacts
2014
19
So Behavioral Economics shows us were emotional and irrationalWe
make decisions intuitively, and were not very good at itSo we need
to understand principles like:Mental ShortcutsValue
AssessmentsEmotional Impacts behind our financial decisions
Behavioral Economics: Good and Evil Practices in the Insurance
and Financial Industries
2014
Bob ThomasDirector of User ExperienceLiberty Mutual
Insurance
Email:[email protected]
Twitter:@bobthomas
Original photo source:
http://3.bp.blogspot.com/-3d5cnvWaRhw/UaYN9yTucfI/AAAAAAAAAPk/CDlSqE3DJzU/s1600/CloseUpGuard_Blog.jpg.
This photo is used here for personal, non-commercial use.
2014
Thank you, London and my fellow UX professionals. Again, Im Bob
Thomas, Director of User Experience at Liberty Mutual Insurance.
You can e-mail me at [email protected] or contact me
on Twitter @bobthomas
20
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