Tuesday, June 27, 2017

Anal Fishers

Do you have Anal Fishers?  You know, as friends?  

I know some people who spend their time worrying about the weather and the moon phases.  They think (and talk) about wind direction and water levels and water clarity.  They organize their tackle boxes by color, weight, diving depth, brand, or whatever else.  Their rods and reels are matched, maintained and oiled.  And they could tell you the retrieve speed of all their reels and how many ball bearings they all have.  Their coffee tables are covered in editions of BASS Magazine, and they always have a fishing forum open on their computer.  You could eat off the floor of their bass boats, but they don’t allow their guests to bring food in them because of the crumb risk.  

Watch this old SNL video. It's hilarious.

Here’s the thing, though.  They never actually go fishing.  And when they do, they usually come home with some sort of overanalyzed excuse about why the fish weren't biting.  I know that you know people like this.  They are more planners than doers.  

It isn’t just in fishing that you find these type of people of course.  That just happens to be one of my sports of choice and it makes the title funny.

Anal Fisher.jpg

This reminds me of those in business world who focus on rules, procedures and protocols instead of free thinking and creative problem solving.  These people are usually employees, not business owners.  When they are business owners, they do better as franchisees, since there is a set framework.  

Being Anal Retentive, as Freud characterised it, or having mild Obsessive-Compulsive Personality Disorder (OCPD, not OCD) isn’t always bad for business.  We may even desire these traits in some professionals.  Computer programmers, engineers, and actuaries need to be precise.  

What about consultants, designers, salespeople, and doctors?  Would you prefer these people to be free thinking problem solvers, or rule followers?  Your opinions on this probably vary.  I would say that it could be situational, but flexibility is a nice skill to have when things don’t line up perfectly.  

Right or wrong, I happen to enjoy working and fishing with people who just push through the problems and make it happen.

-Insurance Professor

Friday, June 16, 2017

Anchoring Away: How Much Should You Pay For Something?

How do you know how much you should pay for something? How do you know what’s a deal and what’s a ripoff? You need some sort of reference point...a cue to help you evaluate.
The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. Stores use it all the time to convince you to buy.  So if you’re shown a pair of jeans for $100 and then a similar pair for $150, then the pair for $150 seem expensive. But if you’re shown a $300 pair and then a $150 pair, the same $150 jeans seem like a steal by comparison.
Remember when J. C. Penney introduced “everyday low pricing?”  They wanted to eliminate coupons and instead create a best price all the time atmosphere.   Too bad they weren’t aware of the power of the anchoring effect. When sales slid bigtime, they got the message. Customers need that anchor number to inform them that they are getting a bargain.

All buyers, no matter what they are purchasing, want to know these two things:
1) What does it cost?
2) What do I get?
Potential customers believe if they know what they’re getting in exchange for the money they’re giving up, they can choose whether or not the product is worth it. Here’s the problem: human beings aren’t rational buyers.  Whether or not something is worth it depends on several factors. Most importantly, it’s decided by our expectations. Expectations are set by anchoring.
Dan Ariely did an experiment on pricing for The Economist.  When he surveyed 100 MIT students about those pricing options, Ariely got these results:
Subscription type
Cost for a year
Percentage who chose it
Web only
Print only
Print and Web
Why did the Economist even bother with that $125 print only option? Ariely conducted a second survey that shows why. In the second survey, Ariely removed the $125 print only option and asked a separate set of 100 MIT students what they would choose.
Here’s what happened:
Subscription type
Cost for a year
Percentage that chose it
Web only
Print and Web
The mere presence of the print only option even though no one chose it prompted a much higher percentage of people to choose the more expensive $125 print and web option. The difference would have amounted to 43 percent more hypothetical revenues for the Economist. Print and web for $125 seems like a much better value when it’s anchored by a $125 print only option and a $59 web only option.
So if you are engaged with a client, should we artificially inflate our prices and let the anchoring effect work its sales trickery?  Um, no.  There is an offsetting sales principle called price integrity which is crucial for building trust and continuous business relationships. We shouldn’t present a higher price without demonstrating more value and we shouldn’t show a lower price without a reduction in benefit.  In both directions, clients should expect and see integrity in the price.

I Know the Market: Trust Me
In an experiment conducted some years ago, real estate agents were given an opportunity to appraise the value of a house that was actually on the market.  They studied the house and the comprehensive booklet of information that included an asking price. Half the agents saw an asking price that was significantly higher than the listed price of the house; the other half saw an asking price that was lower than listing.  Each agent was asked about a reasonable buying price and the lowest point at which they would agree to sell if they owned it.  
What factors affected your judgement?
Remarkedly, the asking price was not one.  They took pride in their ability to ignore it.  Wrong, the anchoring effect was 41%.  That’s a $82,000 difference between a $200,000 house and a $400,000 house assuming it’s the same house just listed differently.  A group of business school students with no real estate experience was 48%.  The only difference was the students admitted to being influenced and the professionals did not.

Does that mean we should disregard the anchoring effect altogether?  If we are providing value, we should be aware of the anchoring effect to help us deliver the highest level of benefit for which our clients are willing to pay. This might mean presenting solutions in a good, better, and best approach for a particular need. Our best option is our anchor and provides the most benefit to our client. Consequently, it has the highest price. If our client is unable or unwilling to purchase this solution, then we have established a point of reference for both benefit and price, allowing us to adjust down our solution until we fit the highest level of benefit with the highest acceptable price.

Peoples’ objections to price rarely have anything to do what is or is not fair. They come from a place of inexperience and emotion.  The client simply doesn’t have the background you have and relaying the message can be difficult.  As someone who is trying to do the best thing for the client you are torn between the elements of price integrity and getting the business.  You have to avoid paralysis by analysis that a prospect can slip into and present your solutions in a manner that gets them to act.  If done properly it is a win for both sides.


Friday, June 2, 2017

Do You Love To Win or Hate To Lose?

Do you love to win or hate to lose?  Pro athletes get asked that question fairly regularly.  What really drives them?  Is there a right answer?  Well, the results are in and people hate losing.  Well, they hate losing more than they like winning at least.   

Prospect theory explains that there is asymmetry between gains and losses, and it really is very dramatic.  Let’s look at an example of how this works with money.

  1. You have $1,000 and you must pick one of the following choices:
Choice A: You have a 50% chance of gaining $1,000, and a 50% chance of gaining $0.
Choice B: You have a 100% chance of gaining $500.

     2. You have $2,000 and you must pick one of the following choices:
Choice A: You have a 50% chance of losing $1,000, and 50% of losing $0.
Choice B: You have a 100% chance of losing $500.

The results of this study showed that an overwhelming majority of people chose "B" for question 1 and "A" for question 2. The implication is that people are willing to settle for a sure thing (even if they have a reasonable chance of earning more), but are willing to engage in risk-seeking behaviors where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains. We have a loss aversion and the ratio is about 2 or 3:1.

What if I told you that you were more likely to become disabled than to pass away prior to 65.  At no age is the risk of death greater than being disabled. For life insurance, the major problem is getting individuals to assess how much coverage they need. For disability insurance, the major problem is getting individuals to assess any need at all.

4 to 1
3.5 to 1
2.7 to 1
2.1 to 1
1.8 to 1
1.5 to 1

A majority of American adults have no private, long-term disability insurance, to replace lost income.  The evidence for the risk is clear.  And going back to prospect theory, it would be natural to theorize that most people would want this risk addressed.  

Let’s consider why more private/personal disability insurance isn’t bought.  Since we know that people are loss averse, we also know that they are averse to paying premium.  Even though there is a great risk of loss in becoming disabled and not being able to earn income, the loss of the premium dollar is a sure thing…..Throw this idea into the mix though… What if they never had the money to begin with?  As in, if the premium is deducted from their paychecks.  If the money never reaches their bank accounts, the premium for disability becomes very palatable.

People Love Getting Money Back, Even If It Was Always Theirs In The First Place.
Think about tax refunds.  Tax refunds are returns of overpaid taxes at 0% interest.  This seems like a pretty sour deal, especially considering how much we complain about Money Market and CD Rates.  So why are people so much more happy to collect 0% interest on their money than to take what they would have overpaid in taxes and save it over the same period of time for a positive rate of return?  Maybe it’s because underpaid taxes carry a 3% interest rate, but I don’t think so.  

People Like Return Of Premium.
They like to see cash value in their Whole/Universal life policies, even if the insurance is only for death benefit.  They want to get something for their unused premiums, even if it’s only their own money back at 0% rate of return.

Let’s say you recently started a new job and were offered 2 disability options.  Both pay ⅔ of your salary if you are unable to work for more than 30 days, and for so long as you are disabled, up to age 65.

Policy A: Will reimburse you $1200 if you do not file a claim within 5 years.  It costs $90/mo.
Policy B: Has no refund.  It costs $70/mo.

The rebate policy was preferred by 57% of respondents.  The average odds of collecting disability payments and not receiving some or all the refund was 3.6%.  

So what this means is that out of 1000 people, 570 would choose to basically take out a 5 year annuity with a 100% penalty (if they change jobs or become disabled) for a 0% rate of return, instead of doing something else with the $20 per month.  WOW!

Availability Heuristic
The availability heuristic comes into play as well.   The Availability Heuristic and The Proclaimers  If a recent outcome was negative without regard to the odds a person will put more weight on that situation.  

If someone has had a family member or friend pass away or become disabled, they are more apt to see value in covering that risk even if their age, health, or financial situation is completely different.  I just had a client call to buy life insurance because a friend of his died piloting a small plane that crashed.  My new client is not a pilot himself.  He also happens to be someone I had approached 6 months earlier about adding more life insurance and he put it off.

Tennis great Jimmy Connors knew his own emotions and stated that “I hate to lose more than I love to win.”  As a consumer, this is built into our psyche.  Many financial decisions are ultimately based on emotion.  Taking a step back to fully assess the relevant details is key.  This is especially true on a risk management choice.  Force your emotional mind take a back seat to your practical mind long enough to make a smart decision.