"Let me think about it” is often a prospect’s polite way of saying that he doesn’t want to buy what’s being offered. However, that response can also mean that the agent wasn’t able to penetrate the decision-making biases that result in no decision being made.
Following are a few of the biases and what can be done to overcome them.
The endowment effect is a bias in which clients place a higher value on an item simply because they own it. A good example of this is trying to get more than market value because of the sentimental value that is attached to the item.
An obvious solution to the endowment effect is to show the seller what the true market value is; however, this doesn’t work when a seller refuses to recognize that his widget is the same as another widget.
The good news is the endowment effect doesn’t apply to money or money equivalents. A seller may think his collectible pin is worth $6 even though the same pin can be bought for $5 elsewhere, but he doesn’t think his $5 bill is worth $6.
Along the same lines, people don’t think their mutual fund, annuity or certificates of deposit are worth more than market value simply because it is theirs, so the endowment effect usually does not get in the way when you are trying to convince a client to move those dollars to a new annuity or insurance policy. However, there are other biases that do.
Anchoring is the mental value we give an item, based on a past value rather than current value.
Here’s how anchoring can interfere: A potential fixed annuity buyer has witnessed his IRA drop in value from $100,000 to $75,000; he is tired of losses and likes the protection a fixed annuity offers. However, he won’t transfer his IRA to the annuity because he can’t afford the $25,000 loss.
The reality of this situation is that he has already lost because the IRA is worth only $75,000, but in his mind the value is still $100,000.
One way to deal with the problem caused by the old value is to provide a new value—acknowledge the old anchor by referring to it as a loss.
“Your IRA has lost $25,000 and is now worth $75,000.” You then raise the possibility of future losses: “While we don’t know what will happen in the future, how would you feel if your IRA were worth $50,000 next year because you didn’t transfer to the annuity today?”
What we’ve done is replaced the $100,000 anchor with a new anchor of $50,000. Thus, preserving the $75,000 by transferring the IRA to the annuity is more attractive because it avoids losses.
Another way to move the anchor is to refer back to the lower original purchase price. If the person had initially placed $50,000 in the IRA and the current value is $75,000, talk about doing the transfer to preserve the remaining $25,000 gain.
In the previous example we suggested the person avoid future losses and in this example we suggest preserving past gains—both are ways to move the anchor to reflect reality and help your client make a good decision.
Sunk cost bias is about costs incurred that cannot be recovered and is familiar to anyone who has ever owned an over-the-hill car. The story goes something like this: The clutch in your 87 Yugo went out and will cost $600 to fix. If you had any sense you would junk the car, but just last month you spent $250 to replace the water pump and there was the $500 you spent for tires last winter. You have a lot of money in this car and you hate to lose it by getting rid of it. The reality is that the money spent on the car is already lost—and you can’t get it back. Thus, what you have spent in the past is irrelevant, but it doesn’t feel irrelevant, so you want to keep putting money into a losing proposition.
Sunk cost bias is a reason bad projects continue in the business world (Microsoft Zune, anyone?) and a main reason that people hold on to bad investments.
The solution is simple: Ask your client, “Would you buy that same bad investment today at its current price?” If his answer is no, then move on to something new.
Then there is the age-old problem of inertia. The 18th century essayist Samuel Johnson said, “To do nothing is within the power of all men,” and not making a decision is a way to do nothing. There are several ways to deal with inertia.
• Deadlines. If the rate is really going down tomorrow, there is definitely motivation to do something today—but even if it isn’t, giving your client a brief history lesson may help.
“Do you remember two years ago when I said you could lock in a 5 percent annuity rate for five years and you said you wanted to sleep on it? Do you remember last year when I could get you 3.5 percent for five years and you said you wanted to sleep on it? Today, I can still get you 2.5 percent for five years…or do you want me to come back next year when the rate is 1.5 percent?”
• No Decision Is a Decision. The problem with making a decision is it may be a bad one and risk aversion means people avoid the risk by doing nothing. When a client says he wants to delay a decision, it sometimes helps by framing this delay as a decision.
“So you’ve decided now is not the time to protect your family from financial ruin by signing this life insurance application?”
• Overpowering inertia. Most people won’t bend over to pick up a penny, but almost all would quickstep across a road if they saw a $20 bill in the gutter. If the reason for making a decision is compelling, it overpowers the inertia. This can be done by making the benefits of your solution more vivid.
“If rates stay the same, this index annuity could earn you more interest by next year than your CD could earn by 2021.”
Or by using loss aversion: “How would your children eat if you get hit by a truck tomorrow?” Or bringing the future into the present may be the ticket: “If you act now you can be guaranteed your $100,000 premium will produce a lifetime income of $10,000 each year in retirement.”
The two self-inflicted mind games driving all forms of decision-making inertia are a psychological need for consistency (we don’t like change) and the cognitive biases that interfere with rational reasoning.
Now you have some ammunition to help you deal with decision-making biases. These suggestions aren’t a cure-all, because biases are difficult to overcome, but they will help you help your clients make better decisions.
provides research and consulting services to insurance companies and financial firms in a variety of annuity areas. He also serves as director of research for the National Association for Fixed Annuities and as a research fellow for Webster University. In 1994 he wrote a book to help banks market investment and insurance solutions to their small business clients. In 1996 he produced the first independent hypothetical return monthly publication comparing all index annuities on the market, and in 1997 created the first comprehensive report of index annuity sales, products and trends, "Advantage Index Product Sales & Market Report" (quarterly). His insights on the annuity and retirement income world have appeared in hundreds of publications. In 2006 the National Association of Insurance Commissioners asked him to address their annual meeting and teach regulators the realities of index annuities. He was invited back in 2009 to talk to the NAIC about the effects of aging on senior decision-making. He is a frequent speaker at industry functions. Prior to forming Advantage Compendium, Marrion was president and owner of an NASD broker/dealer with offices in nine states. Previous to that he was vice president of a life insurance company and vice president of an NYSE investment banking firm. He has a BBA from the University of Iowa, an MBA from the University of Missouri, and a doctorate from Webster University. Marrion can be reached at Advantage Compendium, 2187 Butterfield Court, St. Louis, MO 63043. Telephone: 314-255-6531. Email: firstname.lastname@example.org.