Mini Episode 23 - Why do I keep paying for insurance that I never use?

Francis from Carlton wants to know why she feels so unsure about staying insured.

Dan (00:17):
Hey, and welcome back for another episode of Bad Decisions. I'm Dan Moha, co-founder of Hardhat, and today we have a question submitted to us from Francis in Carlton Francis, What you got

Francis (00:29):
After years of paying for monthly car health, life, even pet insurance, I've never had to make a claim. So why do I keep paying for insurance that I never use?

Dan (00:38):
Francis? Francis, Francis, great name by the way. They do say that nothing in life is certain other than death and taxes, but you, my dear friends, seem to have added something else to the mix. All right? And we know it's kind of true. Month after month, the cash just disappears from our bank accounts. Health insurance, when a guy like you never get sick, car insurance went still thanks to Covid. We can't even remember what it's like to fill up the tank. Content insurance when working from home makes it pretty much impossible to get robbed life insurance when you haven't even come close to dying yet. Not even once and on and on and on. It goes without a claim, a benefit, or the need for a safety net anywhere to be seen. So Francis, cancel it. Go on. I dare you. Just live a little.

(01:23)
Why not self-insure? Save all those premiums and just buy a new car or guitar or kidney, if or when the need arises, right? Mm. Didn't think so, right? What if, What if is what we ask ourselves? What if I some crazy chance, a perfect bill of health or flawless driving record takes a magical turn for the worse. We know the likelihood is minuscule and that all those premiums can't possibly make rational financial sense. After all, insurers are pretty good at running profitably, but still we stay month after month payment after payment. The thing that I think is so interesting about this question is that so often in life we choose tangible short term benefits over hazy long term ones. In fact, for those of you paying attention, there is a whole other bias that speaks directly to this Hello temporal discounting. So what is it about insurance then that completely flips the script?

(02:16)
Well, I'm glad you asked because the thing that flips the script is something called zero risk bias. The zero risk bias describes how irrationally strong preference for situations that have absolute certainty. So by and large, we prefer options that eliminate one type of risk completely, even if that increases the total risk that we're exposed to. In other words, we love a sure thing, even if objectively speaking, the sure thing is not the best thing for us. Research conducted by Z Hower, cited by Cardman and Fisi 1979, asked participants to imagine they were playing a game of Russian roulette at good times, right, with the option of paying for individual bullets to be removed from the cylinder of the game. Now, what is irrational, but also entirely unsurprising is that participants who are willing to pay far more to have the final bullet removed to certain life than they were to have the third or fourth last bullet removed, even though the reduction in risk is identical for the removal of each bullet.

(03:12)
Now, one of the biggest benefits of succumb to the zero risk bias is the joy we get from having one less thing to worry about in a world of seemingly endless things to worry about. It is not surprising that we will pay a premium to have one such thing scratched entirely off our lists, which is exactly what happens when we pay our insurance premiums. Sure, we know in our heart of heart that we'll probably never make a claim, but the peace of mind is almost value enough when it comes to selling. Reducing risk is always a good strategy, but if we can remove it entirely, you know, make something zero risk, we will enjoy disproportionate returns. It's no wonder that risk eliminating sales techniques like the money back guarantee that free trial and the post-purchase price match have been around for as long as sales people have to make the most of zero risk bias.

(04:00)
Brands can look for ways to remove risk completely from the product itself. So guaranteed pesticide free to remove risk from the way the product is purchased. You know, cancel any time or remove risk from the outcome that customers are using the product to create. So perfect pancakes or cheaper phone bills, guaranteed. Cause let's be real. Nobody with Tom Cruise likes risky business except you, Francis. And hopefully now you are somebody that likes risky business and has had the question about insurance answered. If you are sitting there thinking about a weird and wonderful human behavior that you've observed, shoot it through to me and I will do my best to answer it. You can hear me up all over the internet at dad mon height, or get me by email and ask Dan Hard hat dot comu. See you next time.