The surprising reason why we make bad decisions

The surprising reason why we make bad decisions

Here at PolicyGenius we've taken a serious, scientific interest in bad decision making to help people make better insurance decisions. In today's serious, scientific inquiry into bad decision making, I will explain a rampant but little-known decision making bias with the science (nay, magic) of tacos.

I love tacos. I bet you do too. I'll also bet you've never broken down the decision making science behind whether to eat a taco. Don't worry, I've done it for us:

Taco equationIf "Taco eating utility" is greater than 1 (i.e., your expected enjoyment is greater than the probability of regret), then eat the taco. Simple, right? And if you're like me, with a hunger level usually at Defcon 1, then the result of this decision making calculus is often (always), "Eat the taco!"

What’s at play here is more than the appeal of tacos; it’s a cognitive bias called the hot-cold empathy gap. That gap refers to the fact that you make a decision and deal with the outcome of that decision in different emotional states. When that happens, you’re usually unhappy with the outcome of the decision and wish you’d made a different one. How it usually works:

  1. You make a decision in a rational (cold) state. For example: you’re not hungry and reviewing your health habits and declare, "I will go on a diet and not eat tacos."

    taco image
  2. When faced with the outcome of the decision in an emotional (hot) state, you’re unhappy with it. And you undo that decision: "I’m starving and tacos are delicious. I will eat all the tacos." And off you go on a spiral of regret.

    Blowing your budget, cheating on your diet, putting off important tasks – blame it on the hot-cold empathy gap. Research reveals that people are not very accurate at forecasting their emotional states – which leads to decisions that you won’t stick to or will be unhappy with.** In the case of insurance, here’s where it gets you into trouble (and, unlike the decision not to eat tacos, you can’t undo it when you want to):**
  3. In a rational (cold) state, you decide "I should probably get renters insurance but there's a Law & Order: SVU marathon on now. I'll get around to it before I ever need it." But you never get around to it. There's always a Law & Order: SVU marathon on.
  4. Oh no! A few months later your apartment is broken into. Thousands of dollars worth of your stuff is stolen. You’re stressed and upset and feel violated. You really wish you'd taken the 15 minutes to look into renters insurance!

    Awesome corgi photo credit:

    Bottom line: when you need insurance, you’re in an emotional (hot) state. When you’re deciding about what insurance to get, you’re in a rational (cold) state. When you’re in a rational state, you underestimate the influences of emotional drives, and how you’ll feel when you’re sick / been robbed / been in an accident. Most people know they need insurance. But most people are under-insured. Be smart! Beat the bias! Get insurance! Eat tacos!

    Readers: what decisions do you usually put off? What decisions have you regretted when faced with the outcome? They can be silly or serious - let us know in the comments! We're putting together an infographic of the responses (and our own research).