Was That A Rational Decision? Behavioral Economics in Reinsurance

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Was That A Rational Decision?Behavioral
Economics in Reinsurance

• William Samuelson, Professor of Finance and
  Economics at Boston Universitys School of
  Management
• Chris Svendsgaard, Senior Actuary at Swiss Re
• Barry Zurbuchen, Vice President at Allied World

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Outline

• Introduction (Zurbuchen)
• The Winners Curse Example (Samuelson)
• The Winners Curse in Reinsurance (Svendsgaard)
• Pitfalls in Assessing Risks (Samuelson)

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Overview

• Behavioral Economics Psychology Economics
• Deviations from standard economic model
• Bounded Rationality Limited cognitive abilities
• Bounded Willpower Make choices not in our
  long-run interest
• Bounded Self-interest Willing to sacrifice for
  others

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Bounded RationalityCognitive Biases

• Limited brain power and time Therefore
  rational to adopt rules of thumb
• Overconfidence
• Anchoring
• Extrapolation
• Overreaction