Classical economics says consumers are rational. Behavioral economics says consumers are normal, which is why dealing with prospects in a rational way doesn’t always work.

As an example, if a prospect should move money from a market-risk investment to a no-market risk-of-loss fixed annuity, would the prospect be more likely to move from the investment to the annuity if he was up 10 percent in his investment or down 10 percent in his investment? In other words, would he be more likely to move if he had a gain or a loss?

The answer is that a prospect would be more likely to move to the annuity if he had a 10 percent gain in his investment. That’s right, a gain. The reason is due to something called regret aversion. Although the rational answer is that consumers tend to avoid more risk, the behavioral reality is if we sell the investment at a loss, we would have to admit we were wrong and that we had made a bad previous decision.

In fact, we’re doubly cursed. What if we sell the investment at a loss and the investment subsequently goes back up? We’ve now made two bad decisions. This is why investors tend to hold lousy stocks much longer than they should – the mental pain of admitting we were wrong is harsh.

The stock market has been heading higher over the last four years and most investors have gains. This year’s market events have shown that investments still can go down. This is an excellent time to talk to consumers about whether they should take some money off the table and leave as a winner, and put that money into a fixed annuity where they can never be a loser.

However, even if a consumer has a stock market gain and is concerned about the possibility of a bear market, he still may not move to the fixed annuity. The reason is, once again, regret aversion, but this time it is triggered by the possible regret he would feel if the stock market soars again and he misses out on potential gains. This is why you need to explore other areas where regret aversion works in the annuity’s favor.

For example, ask the consumer if he believes interest rates are heading up. If he answers yes and he owns bonds, he is creating an internal psychic conflict because he knows (or will know after it is explained to him) that issued bonds usually go down in value when interest rates go up. But fixed annuities do not lose value when rates rise. The consumer may anticipate feeling potential regret that a move was not made from bonds to annuities today before the bonds dropped in value and so be more receptive to the annuity story.

The same regret may be triggered on bank instruments. It has only been a couple months since the consumer wrote down the taxable interest income earned on Form 1040′s line 8a and wrote the check to the IRS on all that compounding bank interest. By showing the tax deferral advantage of a fixed annuity, you can help the consumer minimize his regret in April 2008 by moving some of that bank money to a fixed annuity in 2007.

As financial beings we are seldom totally rational, but a fixed annuity may cause fewer regrets about the decisions we make.