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38 | The South African Insurance Industry Survey 2016

The endowment effect Availability bias - heuristic unusual events, such as homicide or airline accidents, and
Another factor that impacts the value that can be utilised In another Kahneman experiment, he describes another less coverage of more routine, less sensational events,
by insurers is the endowment effect. This goes hand-in- interesting bias - the availability heuristic. The availability such as common diseases or car accidents.
hand with loss aversion. heuristic is a mental shortcut that relies on immediate
examples that come to a given person's mind when This bias could be clearly seen in the recent Ebola
A good illustration of this effect is a study done by evaluating a specific topic, concept, method or decision. outbreak in Africa and the reaction the world had to it,
Kahneman. Participants were given a mug and then The availability heuristic operates on the notion that if despite the low probability of contracting the disease.
offered the chance to sell it or trade it for an equally something can be recalled, it must be important, or at
valued alternative (pens). They found that the amount least more important than alternative solutions which are For instance, when asked to rate the probability of a
participants required as compensation for the mug not as readily recalled. Subsequently, under the availability variety of causes of death, people tend to rate news-
once their ownership of the mug had been established heuristic people tend to heavily weigh their judgements worthy events as more likely because they can more
("willingness to accept"), was approximately twice as high toward more recent information, making new opinions readily recall an example from memory. Moreover, unusual
as the amount they were willing to pay to acquire the mug biased toward that latest news.8 and vivid events like homicides, shark attacks, or lightning
("willingness to pay") when they did not own it. This is are more often reported in mass media than common and
clearly irrational. In one of many studies done to prove this phenomenon, un-sensational causes of death like common diseases.
participants were presented a mathematical quiz as either
Simply put, people value their own possessions higher 1x2x3x4x5x6x7x8 or 8x7x6x5x4x3x2x1. Participants who South African media is littered with stories of homicide
than the market does, resulting in insurance being taken were presented the equation with the larger numbers and murder. The actual murder rate (as shown to the right)
out on these belongings. This can be seen in insurance first (8x7x6...), estimated a significantly higher result than is very high when compared to other countries. This could
marketing with insurers playing on the sentimental value participants with the lower numbers first (1x2x3...).9 cause the South African public to overestimate their odds
of the consumer’s possessions by giving cars names or of dying and consequently over-insuring their lives.
recalling memories cars might provide. For example, after seeing news stories about child
abductions, people may judge that the likelihood of this Do South Africans overestimate their odds of dying due to
Is there potential for insurance companies to capitalise on event is greater. Media coverage can help fuel a person's the sensational (newsworthy) ways in which people in the
this by providing insurance based on more than the market example bias with widespread and extensive coverage of country are often killed?
value of what is at risk?

8 ^ Phung, Albert. "Behavioral Finance: Key Concept- Overreaction and Availability Bias". Investopedia. February 25, 2009. p.10. December 1, 2013.
9 Tversky, Amos; Kahneman, Daniel (1973). "Availability: A heuristic for judging frequency and probability". Cognitive Psychology