Should the study of psychological biases be included in actuarial education?

Medibank actuary Andrew Gower looks at how psychological biases interact with the actuarial syllabus and why a greater understanding of these biases is important for personal and professional growth.

Psychological biases form an important aspect of why humans (and other animals) behave the way they do. Understanding various psychological biases is critical for most professionals, although most have limited training in identifying where a bias impacts their day to day role. The interrelationships between how we feel, how we think and how we act are critical in understanding ourselves and others; once understood you can look to ways of changing them with a greater chance of success in analysis, communication and influencing others. 

Bias in actuarial science

Behavioural economics is a combination of economics and psychology and often focuses on how bias’ impacts economic decisions. This challenges the use of models without understanding the risks that exist within the model itself (rather than the assumptions). As advisors to the business, we often need to understand and influence management decisions. These decisions often are underpinned by personal bias that individuals (and collectives) hold.

Two quite opposite qualities equally bias our minds – habits and novelty. – Jean de la Bruyere

Biases play an important part in the insurance industry and are something actuaries have understood in some form over many years. Some key biases that underpin insurance and finance include:

  • The certainty bias and risk aversion. People prefer certainty to uncertainty.  Insurance (and investment guarantees) provides certainty, allowing people to reduce the financial uncertainty in their lives.  Many commercial pricing decisions that actuaries are involved in rely on understanding how customers value certainty.
  • Anchoring results. As professionals, we have often seen results over many years. As we build up our knowledge base, it becomes harder to shift our thinking when new data becomes available. 
  • Survivorship biases in analysis. We often focus on those that have survived, rather than focusing on those that are no-longer with us. This is important in analysing stock markets, but also companies more broadly.

Where else does psychology play a part?

Understanding various biases can assist in many ways both internally, in our own careers, and externally with the businesses we advise.

Understanding the biases that influence you is likely to improve your personal effectiveness. A great example of this comes by understanding how we deal with ambiguity (a key part of the certainty bias). 

As actuaries, an important part of our role is to communicate uncertainty in results. If we don’t understand our own views on uncertainty, how can we communicate this to others who are often unaware of their bias? 

By understanding our own bias, we can shift our thinking away from the certain to the uncertain which is the first step to improved communication. 

The noblest pleasure is the joy of understanding. – Leonardo da Vinci

Looking externally, there are many areas where improved understanding of bias can assist in our work. One such example is in understanding customer behavior. As our roles within business have grown, we have often become closer to customers. While historically, our core analysis was often on customer behavior with limited choice (e.g. death rates), we now focus on events where the consumer has wider choice and the customer’s (and society’s) biases play an important role in what occurs. To provide the most value to our business partners, understanding these aspects can assist in:

  • Pricing decisions, both from customer’s viewpoint of shifting risk to the insurer, but also assisting to understand the broader proposition the insurer is offering and how this is understood and valued.
  • Reducing product design risks both now and in the future.
  • Understanding which of the possible actions we could take would be the most effective?
  • Understanding what might happen if we change products and how should we communicate to customers?

While other professions may take the lead in these areas, actuaries can bring key technical skills in finance and statistics along with a holistic understanding of insurance, allowing these aspects to be integrated more broadly into decisions.

A good summary of 20 key biases features in this article.  Many of these are unknown, although others are well known.  It is worth reflecting on these from both a personal and professional view point.  Even ask others if they seek these within you, you may be surprised at the answers (and they may be surprised of the question).

As I have progressed further into my career, these aspects play an increasing importance in broader leadership and management roles. Providing leadership is often inwardly understanding the personal assumptions I have built up over many years and seeking to modify them before moving onto external leadership. For me this is gained via reflecting on what has happened, how I felt and acted and why I acted in such a way. This journey is ongoing and will be forever part of my life; it isn’t an easy journey always but rewarding in many ways.

The actuarial syllabus

While one possible approach of gaining knowledge of these aspects is to include them in the formal actuarial syllabus (most likely as part of the Actuarial Control Cycle), there is limited space in the current syllabus and we should recognise this.

Students may not recognise the importance of understanding biases until they start working so the study is likely to have limited value during university.

We also don’t need in-depth knowledge of all aspects of psychological biases but I believe we all need to be aware of some basic psychology concepts and understand biases that impact our work.  This knowledge could be gained in a range of ways:

  • If you are still at university, consider doing breath subjects looking at biases that people hold. These are often covered in management or marketing
  • Many Ted talks look into certain aspects of psychology. These are a good resource for many people.
  • Online resources such as Coursera.org and other online learning providers can provide courses that cover aspects of management bias
  • There are many books looking into bias in management, marketing, pricing (amongst others) that are worth reading.
  • Other programs offered by development organisations including the Actuaries Institute’s CPD roadshows which have focused on these aspects of your career in the past.
  • Personal one-on-one coaching can assist in supporting you reflecting on these areas and can be invaluable.

Only once you are aware, can you work on change.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.

Comments

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ActuaryinTraining says

24 November 2015

Great article Andrew. The actuarial syllabus still has some way to catch up with modern thinking on behavioral economics and similar subjects. Our models still assume that people make decisions based on purely rational thinking, which is obviously not true.


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