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Behavioral Economics

Think Fast, Think Slow

Actuaries Thinking a Lot About Behavioral Economics

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These are exciting times for actuaries. On one hand, we are seriously getting our “geek” on with the seemingly endless possibilities presented by the new hard science known as data analytics, or predictive modeling. On the other hand, there is tremendous actuarial interest in the decidedly softer science of behavioral economics (BE).

Indeed, this year’s SOA Annual Meeting & Exhibit in Austin, Tex., featured a number of sessions on BE, including Session 145: Behavioral Economics – The Reason Strictly Analytic Models Fail with RGA’s own Dave Snell, Data Scientist, and Session 92: Brain Games for Actuaries: Understanding Behavioral Finance to Maximize Our Opportunities. Both of these sessions dealt with the irrational behavior that stems from various hidden biases such as anchoring, confirmation bias, sunk cost trap and framing effects, to name a few.

Behavioral economics (or behavioral finance) caught public attention five years ago with the publication of Daniel Kahneman’s best-selling book Thinking, Fast and Slow. Since then, other books on the subject have been jumping off shelves, and a quick search on Amazon results in more than 14,000 hits. Clearly this topic has gone viral.

Public interest aside, actuaries are now taking a closer look at BE and how it applies to insurance: How do our own biases affect our actuarial work? How do customers’ biases result in “predictably unpredictable” behavior? How fallible are our models in light of these behaviors?

RGA actuaries, in the U.S. and globally, have been considering the effects on insurance, and RGA Italy’s Roberto Rizzo offers the following thoughts (albeit from an individual insurance perspective) in his article from the September 2015 issue of RGA Quarterly: Europe. We hope you find the article and the SOA presentations thought-provoking, and we look forward to more discussion on this fascinating subject.

Click here to read [Behavioral Approach to Insurance: A Brief Guide to the Main Effects and Application to Insurance]
 
    

The Author

  • Jeff Schuh
    FSA, MAAA, ACIA
    Vice President and Actuary
    Group LTD and CI

    U.S. Group Reinsurance
    Send email >

Summary

This article summarizes actuarial discussions on behavioral economics as these relate to group reinsurance. 
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