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25 Jul 16 08:58

Which of these two lines is longer?

Homer Simpson would probably say the lower one is longer; Mr Spock would say they are both the same length. Mr Spock would be right of course. (For the sceptics: today's flat screens make it easy to use a ruler to check.)

However, even when we know that the lines are the same length, we cannot help seeing the lower one as longer than the top one. This is an example of cognitive bias – where our perception is not the same as reality.

Over the last 18 months at Swiss Re we've been running a cognitive bias awareness raising programme with the Underwriters in our non-life business. We've been asking ourselves: What is cognitive bias? Where does it come from? Which biases are most likely to affect Underwriters? And is there anything we can do to mitigate it?

We recently shared some of this work at an evening event organised by the Young Members' Committee of The Insurance Institute of London. You can watch the video for a quick overview.

Some background to the topic. The theory of cognitive bias was first suggested by Amos Tversky and Daniel Kahneman in 1972 (Kahneman, D.; Tversky, A. 1972. "Subjective probability: A judgement of representativeness". Cognitive Psychology 3 (3): 430–454). They explained human judgement and decision making in terms of heuristics – mental shortcuts, based on intuition or "rules of thumb" - which allow humans to make rapid decisions with limited information. These shortcuts evolved over human history and for good reason; many of them minimize effort and optimize performance, giving humans an evolutionary advantage. But the instincts that allowed early man to differentiate between an antelope and a lion (and therefore decide whether he was about to eat or be eaten) do not always work well for modern man facing more complicated decisions, especially those involving numerical analysis. Tversky and Kahneman found that these heuristics, or shortcuts, can introduce “severe and systematic errors” into decision making.

The ground-breaking work by Tversky and Kahneman has since been verified and developed by other behavioural scientists. However, although significant academic research has been undertaken on decision making and risk taking in personal and corporate finance, insurers are only just starting to consider the impact of cognitive bias on their business.

My take-away from our training sessions and discussions at forums like the IIL event? It's a topic that generates a lot of interest – but a lot of questions too. We still have a huge amount to learn about how cognitive bias affects us as Underwriters and as a market. What do you think?


Category: Other

Location: UK


5 Comments

Francisco Jimenez - 4 Aug 2016, 3:18 p.m.

Great read! Thank you for sharing this and the video.

Francesca Tamma - 4 Aug 2016, 4:55 p.m.

It's so great to see that people are talking about this! Since 2012, there is a team at Swiss Re that focusses on cognitive sciences and theories like the ones described by Jayne. We apply them to drive value for our business and our clients. Challenges we have tackled in the past include: increasing healthy behaviour, increasing gender diversity in our company, increasing accuracy of disclosures, sales and retention rates... Reach out if you have any questions!

Mario Cortes - 4 Aug 2016, 7:11 p.m.

Nice post, Jayne! Couldn't agree more, and as you say, awareness is a great first step.

I would also suggest, if you've never seen it, the show "Brain Games" from National Geographic. It usually tackles cognitive bias (in a fun way!)
http://channel.nationalgeographic.com/brain-games/

It is available on Netflix, in case you're a cable-cutter like me.

Terry Knull - 4 Aug 2016, 11:39 p.m.

Great post Jayne. I agree we have a long way to go in our evaluation of how cognitive bias affects us as Underwriters. Some points are obvious (i.e. the impact of anchoring to an expiring reinsurance rate), but many more are far less intuitive. I enjoyed being involved in this project when we were researching the topic and wish I had time to continue with this very interesting area of research and development.

Alicia Montoya - 5 Aug 2016, 9:33 a.m.

Last night I listened to this 20 minute podcast on Harvard Business Review, about the importance of hiring and supporting dissenters and non-conformists, and thought: https://twitter.com/alicialamalicia/status/761275483518631936


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