Ok, now that I have your attention…let's break the title down. Was your initial interpretation, "bias exists; recognize yours"?
As insurance professionals, most of us pride ourselves on the fact that many of the decisions we make are backed by quantitative elements such as sophisticated computer models, costing analysis and data. Yet, in reality, that represents a portion of the way we make decisions. Our bias, that is the "invisible" thought processes that influence our judgement, is a big part of our decision making.
Whether we like to admit it or not, we all apply biases to our underwriting judgement. Sometimes it's based on what we hear, or preconceived beliefs that we have held on to for years. I became aware of cognitive bias during a coffee break conversation with colleagues who were preparing a presentation on the topic for an industry conference. It's interesting stuff!
There is usually resistance to the idea that we're biased. Even those who acknowledge they may have biases, generally consider themselves less biased than others. Underwriters and actuaries often believe that prior experience, knowledge and training effectively counter any biases they may have (particularly statistical ones).
The types of biases affecting our thinking and work as underwriters include:
• "Framing bias" occurs when we draw different conclusions from the same information depending on how it is presented or phrased. (i.e., the title of this article).
• "Confirmation bias" is the tendency to look for, interpret or focus on information that will support or confirm a preconceived belief or idea. For example, underwriters may look at a renewal package and look for patterns to support and confirm our view of the world, rather than evidence to the contrary.
• "Availability bias" is the tendency to overestimate the likelihood of events with greater "availability" in memory which can be influenced by how recent or how unusual or emotionally charged the memories are. "Availability bias" occurs when an underwriter relies on prior experiences that are easily accessible such as views on a particular line of business, keeping up with industry news on emerging risks and other important topics as they relate to our business. As underwriters, we tend to be swayed by information that easily captures our attention.
• "Anchoring bias" is the tendency to rely too heavily, or "anchor", on one trait or piece of information when making decisions. While underwriting, we can experience this bias through our exposure to historical loss performance, projections and results in our costing exercises. (For example, being influenced by last's year's expiring price, or by the broker's or client's expectations about this year's price).
Whew, so much to think about. I walked away fascinated by the impact behavioral science and cognitive bias could have on the underwriting process, and also gained a greater awareness of the elements that should be considered when evaluating risks and exposures.
So…what do you think? How does the way in which information is presented to you influence your underwriting decision? In addition, what about the latest emerging trend on the front page of the national news? Keep an eye on your biases, because recognizing them is the first step towards better underwriting decisions!