Behavioral economics, the branch of economic theory that is informed by the empirical study of human cognition, has become one of the most significant intellectual trends in the social sciences. And because real-world insurance executives, underwriters, and policyholders are homo sapiens – not homo economicus – behavioral economics has a number of important implications for actuarial science in particular. To provide context, this session will begin with a discussion the classical economic notions of homo economicus and rational expectations. Next, more recent, related notions such as bounded rationality, heuristics and biases, and the “clinical vs actuarial judgment” school of psychological research will be discussed. Various examples of biased cognition will be described and related to insurance underwriting and purchasing behavior. Two major themes will emerge: First, the dramatic success of predictive modeling in the actuarial world – and business analytics in the larger business world – is best understood in relation to the teachings of behavioral economics. Second, behavioral economics is particularly relevant to insurance in that financial decisions are examples of what the behavioral economists Cass Sunstein and Richard Thaler call “fraught choices”: they involve probabilistic thinking, are made infrequently, and do not provide immediate feedback. Actuaries who choose to confront these issues have the opportunity to add a new dimension to their skill sets and distinguish their employers or clients from the competition.

Moderator:
James Merz, Hanover Insurance Group

Panelists:
Sharon Tennyson, Professor, Cornell University
James Guszcza, National Predictive Analytics Lead, Deloitte Consulting LLP