Choice architecture is the idea that the way in which choices are framed influences the actual choices that are made. The idea arose out of findings in psychology of persistent and pervasive cognitive biases and decision-making heuristics. The thought behind choice architecture was something like this: if we know how biases affect decision-making, then we should be able to structure choices to “nudge” or push people toward the choices we want them to make by taking advantage of people’s cognitive biases.
Cognitive psychology has given us numerous examples of the way in which framing choices influences what choices are actually made. An interesting example involves default options and organ donation. In countries where the default option is to donate and persons must affirmatively check off a box to show one does not want to donate, the vast majority of persons opt for the default (85-99%). To the contrary, in countries where the default option is to not donate and one must affirmatively check a box to show one wants to donate, the vast majority of people opt for the default (80-95%). The conclusion from this finding is that we can take advantage of the status quo bias (the default option) to achieve a result we want.
Some of the findings regarding cognitive biases are relevant to claims administration. For example, the anchoring bias is the common human tendency to give too much weight to the first piece of information one receives when making subsequent decisions. In the claims setting, this bias could suggest when to make a settlement offer and how much that offer should be. I know many people express frustration at the negotiation process (and I was one such person) and think, shouldn’t we just offer what the claim is worth and be done with it? Unfortunately, the answer is probably “no.” While it may seem easier to price a settlement like it was a piece of merchandise on the shelf at Target, the effect of doing so would likely be deleterious. Even if the offer is fair, it will likely have the effect of convincing the other side that they can get a higher or better settlement because they will judge the settlement value in part based on the first offer they receive which by habit they will consider to be your floor. To take advantage of the anchoring bias, initial offers to settle claims should be sufficiently low so that the other side’s calculation of settlement value is influenced downward. Although this results in the typical tit-for-tat negotiations, it is probably the best way to handle an initial settlement offer given what we know about the anchoring bias.
Another cognitive bias that could potentially be used to one’s advantage in settlement negotiations is the endowment effect. This bias is the tendency of people to value giving something up more than they value acquiring the same thing. The clearest example in cognitive psychology involved basketball ticket prices. When Duke University students were told they won tickets to the NCAA basketball tournament Final Four they valued them considerably higher than students who were told that they had to buy the tickets. In that experiment, students who won the basketball tickets said they would sell the tickets at an average price of $2,400. Students who were told they would have to buy the same tickets said they would buy the tickets for an average of $170. Obviously this is an extreme example, but other research consistently finds that persons value a thing they own 2.5 times higher than the identical thing that they have to purchase.
In the settlement context one might be able to influence outcomes by framing the discussion not as something being given up but rather as something being gained. When claims are settled, employees (for example) tend to think that “I have a claim worth X dollars” so that any settlement is a reduction in the value of “their” claim. Perhaps the discussion could be reframed to suggest that the employee has a claim worth zero dollars because of an IME or a factual defense. In this way, the claimant is not giving anything up but is rather acquiring something, which could potentially lower the value at which they accept a settlement. Obviously represented claimants have an attorney to get through, but still this has the potential to be an effective negotiating strategy. Certainly it is something that one could use at mediation to tell the mediator how one would like any settlement offers to be presented.
So is choice architecture real? It appears to be a legitimate method to influence decision-making under the right circumstances. While nothing can guarantee that using choice architecture will lead to better results, it is a tool that claims professionals can use in situations where cognitive biases are present to try to shape the decision-making process. Choice architecture will generally have little or no cost and potentially has significant benefits. Hence, it is a strategy worth considering the next time you are trying to settle a claim.
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