Should insurance be sold on death or life?

Insurance is gloomy business. One, or rather one’s survivors, benefit only when one dies. But the fact is that if you are reaching out to your target insurers, does it matter whether your
communication refers to the consequences of the insurer’s death at the end of 5 or 10 years as opposed to him surviving
another 5 or 10 years?

Consider a choice situation from Kahneman and Tversky. A group of doctors is told that an epidemic is expected to kill about 600 people in the city. If drug A is used, 200 people will be saved, while if drug B is used, there is a one-third probability that 600 people will be saved, and two-thirds probability that nobody will be saved. Typically it is found that the majority opt for drug A.

Another group of doctors is presented a similar choice with a slight twist. If drug C is used, 400   people will be killed, while if drug D is used, there is a two-third probability that nobody will be killed, and one-third probability that all 600 will be killed. And this time, it is found that typically, the majority opts for drug D.

When juxtaposed together, it is easy to see that drugs A and C are identical, and so are B and D, except that the two problems are framed differently in the two cases. So clearly, how a problem is framed in one’s mind influences one’s decision-making.
Imagine a messy divorce case, involving child custody.

One set of respondents is told that one of the parents has average income, health and working hours, reasonably good rapport with the child and a reasonably stable social life, while the second parent has above-average income, minor health problems, lots of work-related travel, a very close bonding with the child and an active social life.

The respondents are asked which of the two parents would they like to award the custody to. In the work done by Shafir,
Simonson and Tversky, a majority (64%) prefer awarding custody to the second parent. When asked about the reason for their decision, they typically point to the higher income and close bonding with the child as the reasons.

A second group of respondents, similar in character to the first group, is provided exactly the same information and is asked to indicate which of the two parents  would they like to deny custody to. Now, a majority (55%) prefer to deny custody to the second parent on account of excessive travel, hectic social life and health problems. What if these two groups represented a jury?

So what’s going on? Clearly, when the problem is framed in terms of awarding custody to one of the parents, our mind begins to look for reasons that support the decision. This favours the parent with the higher income and the closer bonding. On the other hand, when the problem is framed in terms of denying custody, one begins to look for reasons to deny custody, such as excessive travel, hectic social life and health problems.

The above tendency in human nature takes slippery, and at times, even erroneous forms. The other day, I was listening to a CEO who was not so gung-ho about the growth of the Indian economy.

He said the Indian economy may not be growing at 8-9%. We need to knock about 1.5% off that figure to account for population growth. With China not letting its currency float, it may further impact the India growth story, so that the real growth rate of the Indian economy may well be 6% or thereabouts.

Another CEO was clearly very bullish. He said not only was the Indian economy growing at 8-9%, but that this figure may be understated. Why? Because the economy has a huge element of black economy which could be adding another 4-5% to growth. Clearly, the two CEOs were using other factors best suited to their respective beliefs.

In short, how a problem is framed is important. It could
reverse results. It could make or mar an expensive advertisement campaign for an insurance company. It could give rise to much heat in most meetings.