When a cognitive bias expert gave the keynote address at a Casualty Actuarial Society meeting in May, he called actuaries the unsung heroes and heroines of their property/casualty insurance organizations.
But CAS members and risk management professionals, who valiantly convey information about risks that need to be managed and priced, have a communication problem, said Dr. Gleb Tsipursky, chief executive officer of Disaster Avoidance Experts, explaining how actuaries’ reputations as doomsayers precede them, causing underwriters to ignore warnings delivered in their actuarial reports.
Using the language of behavioral science, Tsipursky explained what actuaries are up against by referencing concepts like “tribalism” and cognitive biases like “the horns effect,” one of more than a hundred biases that impact the way recipients of information process what they’re hearing—and how they react to it.
“The horns effect refers to somebody having little horns,” he said, explaining that it means that when we don’t like one characteristic about someone, then we tend to not like that person as a whole or to trust that person, he said. Citing characteristics like someone’s accent, appearance, culture or religious background, he said, “You don’t like it intuitively. It’s not like you rationally think about it.”
But the list goes beyond those characteristics.
The future-of-work consultant and author of books titled “Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters,” and “Returning to the Office and Leading Hybrid and Remote Teams: A Manual on Benchmarking to Best Practices for Competitive Advantage” gave a vivid demonstration of “the horns effect” in action. To demonstrate, he showed a video of a portion of a keynote he gave to over 100 diversity and inclusion professionals at a human resources conference in Columbus, Ohio.
Columbus, he said, is a town where allegiance to the Ohio State Buckeyes football team is a serious passion for many, and the video showed Tsipursky asking the Ohio-based HR professionals if they would ever hire a fan of the Ohio State rival, the Michigan Wolverines, to work for their organizations.
Only three said they would consider it.
“Which team you root for—does that indicate anything about their performance as an employee?” he asked the crowd after surveying them on the video. “No? Come on. That ‘no’ should be stronger,” he said, reacting to a weak response from the audience.
Offering a takeaway for the actuaries at the CAS meeting, Tsipursky stressed that this was the response of over 100 HR leaders at a conference about diversity and inclusion! “I gave them a chance to change their minds, and they wouldn’t…” When people are passionate about something like this, “they don’t realize what’s going on intuitively…”
“What’s the relationship between actuaries and underwriters? Between actuaries and sales agents? There are natural and very strong horns effects because of the opposition in incentives with these roles and the kinds of people who fill these roles.”
“Now, think about what’s going on in your organizations,” he continued. “You’re an actuary. What’s the relationship between actuaries and underwriters? Between actuaries and sales agents? There are natural and very strong horns effects because of the opposition in incentives with these roles and the kinds of people who fill these roles.”
“You, as actuaries, are focused on appropriate risk analysis—with casualty, looking at various accidents and putting people in the right buckets when you are evaluating the risks of potential revenue. ”
“Underwriters have an incentive to sell. They have an incentive to bring in new business. And so you’ll see them artificially decreasing the prices for customers by putting them in their own bucket.”
“That’s a big, big tension…And with sale agents, it’s even worse.”
The mismatched incentives fuel horns effects, he said. “In order to address that you need to realign incentives, you need to create shared and aligned incentives with similar outcomes between actuarial groups and underwriter groups and sales groups,” he advised, later providing specific instructions on how to do it.
Tsipursky began his keynote at the CAS Spring Meeting with a broad introduction to the idea that a better understanding of “the behavioral science of why and how people’s minds misinterpret data” could be useful to actuaries and other risk management professionals. “Your actuarial reports are aimed to help people make good decisions but often that doesn’t happen,” he said. “What you may not realize is that the reason people don’t want to manage risks is not because they’re simply irrational.…The reasons have to do with the science of cognitive biases.”
“Our minds are not really well set up for getting at the truth of reality,” he said.
Repeatedly referring to the “difficult role of communicating risks to people who may not want to hear risks,” Tsipursky noted that underwriters aren’t the only risk-denying professionals in P/C insurance companies. “Everyone denies risks,” he said, noting that while actuaries have been trained to overcome “the ostrich effect” (sticking their heads in the sand to ignore risks) and “confirmation bias” (intuitive actions to look for information that confirms our beliefs), recipients of their reports—all the way up to the C-suite—are risk deniers.
He referred to the results of a study of 286 organizations across industries that fired their CEOs to support the view. According to the study (conducted in 2005 by LeadershipIQ, a leadership training firm), which analyzed the responses of 1,087 board members who were asked about the reasons for the dismissals, risk denialism was one of the top five. Twenty-three percent of the board members said their companies canned CEOs that denied risks and failed to deal with negative news about reality.
“These are CEOs at the very top levels. You have to deal with these people,” Tsipursky told the actuaries. “The higher you go up the chain, the more you have to deal with these people. You have to understand that and realize that that’s what’s going on in people’s heads.”
“And, of course, CEOs, leaders model everything for their followers. So risk denialism is one of the worst problems in organizations.”
The Way Forward: Get EGRIP
The consultant went on to walk audience members through a series of familiar exercises that involved finding hidden images in optical illusions, (some of which actually had been presented at a prior CAS meeting in different context), to demonstrate optimism bias, pessimism bias and attention bias.
For one exercise, Tsipursky displayed a line drawing and asked whether the session attendees saw the face of a young woman or an old woman depicted. People who see only the older woman, like most actuaries, tend to be people who are more pessimistic, while optimists see just the young woman, he said. (He explained that it’s not truly binary. Rather than being an optimist or a pessimist in all things, people instead generally lean toward one end the range of biased thinking.)
“The optimists are more visionary. They’re more creative. They’re more innovative while the pessimists help improve these ideas, they provide skepticism and implementation, he said, explaining that problems like risk blindness and shiny object syndrome tend to show up among motivating, entrepreneurial optimists.
Those with pessimism bias are good at improving and fixing things. “You’re a manager. You’re an improver,” Tsipursky said, noting, however, that risk aversion and stagnation are two problems associated with pessimism.
“You really need two of the views on each on your teams,” he recommended. Later, during the question-and-answer session, when someone asked what he should do if his existing team did not have two optimists and two pessimists, Tsipursky recommended having people take on alternate roles if teams can’t be restructured. In his consulting work with P/C professionals, Tsipursky said he’ll ask underwriters, “If you are an actuary, how would you respond to these ideas that you’re proposing?” and vice versa.
According to a study conducted in 2005 by LeadershipIQ, a leadership training firm), 1,087 board members who were asked about the reasons for CEO dismissals, listed risk denialism as one of the top five.
The consultant also shared a method to help P/C risk professionals communicate effectively with risk deniers, using the acronym EGRIP—standing for emotions, goals, rapport, information and positive reinforcement—to walk the audience through each step.
• The first step is to identify emotions of stakeholders. “We tend to use arguments and talk about facts and risks. But when somebody is denying obvious facts and risks that tells you that emotions are play. It won’t work if you just keep repeating and arguing with people.…Instead, what you need to do is figure out what are they feeling? When they deny obvious facts, they might be feeling anxiety. They might be feeling hope. They might be feeling anger, excitement.”
• Then identify goals. “What are they seeking to achieve? How can you collaborate with them?… We’re all on the same team [in] the same company, [and] at the end, we’re trying to make a profit, right? So establish shared goals. You want to make a profit. You also want to have less stress and conflict in your workplace. What are you trying to achieve together? Put yourself in the same tribe, appeal to that tribalism. Make sure that they are on the same side as you, and they feel that they’re on the same side as you.”
• Next, build up rapport, he said. “Show that you care about their interests. Show that you care about their goals. Build trust.”
• At that point, it’s OK to proceed to the fourth step, sharing challenging information that goes against the beliefs and intuitions of stakeholder.
“You want to be careful about this. When you provide information that challenges their beliefs, frame it within your broad shared goals, be careful about their emotional blocks, their pain points and show [that] what they’re thinking right now, what they’re doing, what they’re believing is not really aligned with [those] shared goals,” Tsipursky said.
• Finally, after helping stakeholders to overcome their emotional blocks and pain points, it’s time to give them positive reinforcement—to allow them “to have positive emotions about what you just shared, and fix it in their minds.”
“That is how you can get people on your side when they’re obviously not believing in reality. Instead of arguing, instead of relying simply on the facts and statistics,” Tsipursky said. “This isn’t something they teach you in actuarial school, but this is really important as you’re going up your career.”
Tsipursky reiterated the importance of framing information in this way when an audience member said that he could not imagine a leader changing course and admitting he or she was wrong in response to an actuary’s report.
Leaders’ egos are a problem, Tsipursky acknowledged noting that while actuaries are trained to dig for information that goes against their hypotheses and intuitions, leaders are not. “They’re taught to go with their gut…..You want to frame the information in such a way that the leaders don’t perceive themselves to be wrong…You want to be careful about framing the information in such a way, as actuaries often do, which is to highlight too much where leaders are making mistakes and they’re falling into risks.”
“You want to look at people and see where their attention is going to be naturally drawn. Then draw their attention to where you want it to be drawn–areas that cause them pain points.”
The behavioral scientist repeatedly reminded the actuaries: “You excel at data [and] providing database research. [But] you need to learn about how to manage people. And that’s not an easy thing for actuaries to do. When you take your actuarial exams, it says nothing about people management,” but that’s the “real job,” especially for Fellows of the CAS. “Having the technical expertise is necessary but not sufficient,” he said.
“If you provide the report and it sits on a desk drawer somewhere, you haven’t really done your job,” Tsipursky stressed. “You need to do your job by making sure that the data you provide actually influence people,” he said.
Avoiding Risk Decision Disasters
Tsipursky also provided the actuaries with a takeaway business card listing five key questions that they can ask of themselves, and share with others, to make sure they avoid decision disasters.
- What important information didn’t I yet fully consider? In other words, make sure that you consider information that disconfirms your beliefs, he said.
- What relevant cognitive biases didn’t I yet address?
- What would a trusted and objective adviser suggest? That means, consider that “little angel on your shoulder” in a given situation, he said, referring to a mentor at your company or a senior member of your professional organization.
- How have I addressed all the ways that this could fail? “Think about [that] when you’re writing a report and handing it to someone….How can you revise the report in such a way as to address these cognitive biases.”
- What new information would cause me to revisit this decision?