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3 ways to bring investment mistakes to life (insurance)

By Tommy Smoot

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In the book, “The Genetics of Investment Biases,” authors Henrik Cronqvist and Stephan Siegel claim that genetics can explain up to 45 percent of some investment bias. Does that mean we can blame our parents for our investment misses? Of course not. Maybe nurture and nature play a role, but what plays a bigger role in investment decisions are our own biases. 

Some biases are more pronounced than others in times of market volatility. What many in our industry learned after the Great Recession is that clients seek our guidance in these uncertain times. So, we know that it is the right time to call our clients and talk through their concerns. Knowing how these biases are impacting your clients may provide you with insight that can help your life insurance business. 

Here are three “irrational” investment behaviors and how they can lead to life insurance discussions:

1. Anchor bias: During a down market savers can suffer a negative anchor bias, which means they focus on this negative reference point and use it to make future decisions. “When people anchor on a bad investment event, they can be extremely risk-averse,” said Professor Victor Riccardi of Goucher College in a recent USA Today article. Anchor bias may be more pronounced in the face of uncertainty. Does the current market volatility portend that consumers will consider protection more seriously? I believe it does. In a 2009 survey, when adults were asked if the Great Recession made them more interested in financial protection for their family, more than 80 percent said yes. Seize on this. 

2. The recency effect: The “recency effect” is a cognitive bias in which people place more importance on recent observations or events than is actually warranted. The stock market is always risky, but in times of volatility, some may perceive that the market is more risky. Now is the time to reassure your clients that their financial plan was created to ride out these market downturns and that having life insurance as part of their portfolio is an important step in their solid plan. 

3. Status quo bias: People tend to do what’s comfortable rather than what’s important. As market volatility continues, there will be those who decide to sit on the sidelines. One way to combat this is by telling clients that other people like them are purchasing life insurance. According to a LIMRA study, consumers who knew that others like them had coverage were more apt to learn more about it. By nudging clients to review their portfolio while providing context that others are doing the same will hopefully get them to move on big decisions.

It’s human nature to exhibit biases. As a financial professional, having an understanding of how your clients make decisions will serve you well as you work with them through current and future market downturns.

One more thing about blaming our parents: In a recent Ipsos survey of adults age 80 and older, 46 percent reported that they rely on their permanent life insurance policies for retirement income. Social Security, savings accounts and traditional pensions were the only sources of retirement income that were relied on more than the permanent life insurance cash value to supplement income in retirement (of course, accessing cash value will reduce the cash value and death benefit). Rather than blame our parents, we should look to them for resource and guidance. While I still may blame my dad for the hits I take in market downturns, I am thankful that he taught me the value of permanent life insurance.

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