Behavioral Economics – Sales from Your Clients’ Point of View
Behavioral economics is a blend of psychological and economic insights into how people manage risk and make important financial decisions. Research in this emerging field already has produced two Nobel Prizes in economics. Considerable evidence has accumulated over the years demonstrating that people do not process and act upon that kind of information in the ways we might typically assume.
We know most people do not have a good understanding of probability and risk, and many also face constraints — such as the household budget or emotional concerns — not contemplated by traditional economic theory. Because of these and other limitations,economists and psychologists began to look for alternative models to explain this area of decision making.
The result was behavioral economics, which provides more answers and acknowledges the role that psychological factors play in financial decisions. It helps us understand the seemingly irrational decisions consumers make about insurance and investments. The evidence that using the principles of behavioral economics can improve your sales effectiveness is compelling. That’s the premise of this article — you can influence the choices your prospects make by what you say and do to address these underlying psychological factors.
Research has identified a number of specific principles of behavioral economics that help explain the buyer’s thought process in deciding to purchase life insurance. Utilizing these insights can help you create more persuasive and effective presentations – and close more sales. Here are a few key takeaways to consider when meeting with a prospect:
- People do not have a real sense of the value of money They make decisions based on the perceived present value of money. So do not sell on price, but rather on the emotional value your products and services offer. Also, not all money is viewed or treated the same.You must recognize that “we cannot afford it” doesn’t always mean they don’t have the money. You may have to help your prospects “find” the money for them to decide to purchase.
- Emotions and rational thinking both play a part in their decisions, but emotions are more important. An emotional response, such as regret, fear, love or greed, is crucial in encouraging the decision to purchase. People respond best to vivid and personal narrative information. Stay away from general statistical data whenever possible. If you cannot get an emotional reaction from the prospect, chances are you won’t get the sale either
- Simplify the decision-making process. You know from your own sales experience thatbuying life insurance can be complicated. Financial products are often difficult to understand and prospects worry about making the wrong decision, so they may avoid making any decision at all. Where complex financial decisions are involved, people are more likely to use trial-and-error methods and rules of thumb in reaching a decision, and those decisions are often just as good as conclusions based on other, more rational models. Keep things simple to help prospects decide, and make a recommendation as to what they should do.
- People dislike losing more than they like winning. Early death is both unpleasant to think about and low in probability, so people tend to assume it won’t happen to them. To avoid the “loss” of paying the premium they might gamble that they will not need the “gain” of insurance. This can be another reason not to make the decision to buy life insurance.
- People learn from others. Research also shows that people like to do what others do. They assume that something is good (or bad) based on the behavior of trusted family, friends and neighbors, and they will often copy another’s decision in choosing to buy life insurance.
It’s clear that behavioral economics offer a different way of thinking about how and why your clients make their financial decisions. You can adapt your sale approach to incorporate some or all of these principles and insights. You may also find that behavioral economics reinforces methods you intuitively know and already use successfully in working with prospects. Your ability to see and understand the sales process from the client’s point of view will give you an advantage that can translate into a better sales experience for the prospect and for you.
By James Mitchel for InsuranceNewsNet. James O. Mitchel, Ph.D., CEBS, vice president and director, LIMRA’s Developmental Research, is responsible for LIMRA’s exploratory research in the United States and Canada focused on new and developing areas within the financial services industry.