Heuristics: Anchoring and Loss Aversion

Greetings from Milwaukee ~ Happily, the weather is cooperating and golf season is finally upon us in the midwest!

This month’s message is in memory of Daniel Kahneman who died last month after a long and impactful life. Kahneman, along with Amos Tversky and Richard Thaler, were/are all pioneers in the field of Behavioral Economics and have done groundbreaking research and written many books and articles around our human biases and heuristics in decision making. I have to admit, most of their research has too much math for me to follow in raw form, but luckily they also have a great ability to write in common language so even I can benefit from their wisdom!

Understanding their research is really a master class in sales.

Two of Kahneman’s findings are very impactful in helping a prospect understand the value of life insurance and an integrated plan, they are Loss Aversion and Anchoring Bias. Loss Aversion suggests that people feel the pain of losses more strongly than they experience pleasure from equivalent gains, and Anchoring Bias relates to people’s tendency to base decisions on one key piece of information received earlier.

How do we apply this? In layman’s terms, get them excited about something, then take it away!

In the 'olden days' we had an illustration page describing Solomon Huebner’s idea of Human Life Value, and today we have a page in PX called Lifetime Earning Potential. These pages calculate the asset value of an individual’s future income flows so they can apply a current monetary value to their ability to earn a future income. Executed upon correctly, this number is the Anchor from which we can motivate a prospect around their earning potential, explain what is needed to retire, and how much should be set aside for planning. When the prospect is anchored to the great value of their income, the fear of losing that value is very motivating both to them and anyone else who is dependent on their ability to earn that income…it sells a lot of Death Benefit and Disability Income!

Similarly, through their 30s and 40s, it’s not unusual for a prospect's asset balance that is needed to eventually retire to be very similar to their current Lifetime Earning Potential. Because of this, the number will continue to be an effective Anchor when we discuss retirement distribution planning, but now the fear of loss comes from sequence of return risk on their asset balance in addition to losing their ability to earn an income. Enter the value of Permanent Life Insurance…Fear of current income loss = Death benefit need, coupled with the fear of future asset loss in retirement = Permanent Life Insurance need!

When we work with advisors, we focus on how to logically layer these elements to create a compelling story through the planning process:

1. In the fact finder, discuss concepts that are agreeable to the prospect in general (e.g. Yes, it’s important to me that I continue to grow my income to have the standard of living I’d like…Yes, I understand that Asset Allocation will maximize my asset growth opportunity)
2. In the PX, show how the concepts they agreed to generally will apply to them specifically (e.g. the current asset value of my future earnings represents my entire potential standard of living; Asset location in distribution serves an equally impactful purpose as allocation during accumulation)
   • The purpose of a plan is to align a prospect’s Actions with their Values - Values are discovered in the FF and their Actions are shown in their current path PX plan
3. In the recommendations, when the need for Death Benefit is compelling, then if you’re going to pay for the cost of insurance anyway, there are other extremely unique accumulation and distribution benefits that you can utilize to protect your asset balances during distribution (non-market correlated asset, etc).
   • I must put a plug in here for PodPlus episodes 104A, B, C and D on making the PLI illustration come to life at the end of a plan….it’s excellent.

Understanding the concepts makes it understandable to the advisor, helping them articulate the concepts as a compelling narrative makes it actionable to the prospect!

Let me know if I can help your CDO/CGO bring this to life for your advisors (and if you’d like them added to future distribution lists - I know this can get lost in your voluminous email!)

If you or anyone on your team have an interest in studying any of this, I would recommend Nudge by Richard Thaler and Cass Sunstein and Thinking Fast and Slow by Daniel Kahneman.

Cheers to growing your FPP!

Think Differently,

Steve