Thinking fast and slow about terrorism insurancePosted: December 1, 2011
This morning, my colleague Josh Gans and I sat in on a general audience talk by Daniel Kahneman about his new book Thinking Fast and Slow. It was interesting to see how the research agenda has progressed and evolved over the past couple of decades. This idea explored in this book, and in the talk, is that cognition can be broken into two “systems” — one that responds instantly and without effort and another that responds with will and effort. The example given to distinguish between the two was being asked to answer the following questions: (a) what is 2 + 2? and, (b) what is 17 x 24? The first comes unbidden and effortlessly to mind. The second requires conscious effort (which has several physiological traits associated with it, such as significant pupil dilation).
Kahneman is a terrific speaker and these issues are inherently fascinating. One of the examples raised a puzzle in Josh’s mind. The example is asking air travelers whether they want to buy insurance. When asked how much they are willing to pay for $100,000 worth of life insurance for an upcoming flight covering death due to any reason, subjects report a number. When asked how much they are willing to pay for $100,000 worth of insurance for death due to a terrorist attack (only), they report a substantially higher number. The reason given for this is that the “fast” system associates terrorism with fear and fear motivates higher willingness to pay for insurance.
The puzzle is: why do insurance companies specifically exclude terrorist acts from life insurance policies? Presumably, a”slow” thinking group of insurance executives could cash in on the “fast” thinking bias of travelers by inducing impulse purchases of terrorist insurance at ticket kiosks at the time of check-in. Yet they don’t. Having recently had some problematic insurance company dealings, Josh’s “fast” thinking answer was that insurance company execs are not very skilled decision makers. I am open to a more rational reason, though I cannot think of what it would be.