Employees love benefits, but they don’t always make good choices.
Once a year the entire benefits smorgasbord is spread out and employees get to load their plates with whatever benefits they want. Sure, there are other qualifying life events that allow for some changes during the year, but annual enrollment is the Big Event.
If you’ve ever been to an all-you-can-eat buffet with a group of people you know there are different ways to approach deciding what to eat. That’s because in life—as in benefits—we are guided in our decision-making by circumstances and preferences. Moderation and common sense may not factor into the equation. As humans, given one or more options we sometimes make choices that can undermine our health, our financial well-being or our waistline. Behavioral economists study our decision-making and provide insights into what drives our choices, and this applies to benefits choices as well.
A science of human behavior
Behavioral economics is a complex field of study that offers many distinct insights into our actions and choices. For example, risk or loss, status quo bias and outcome bias. These are just three of the forces at work when we make decisions, including when employees make benefits choices. Let's take a closer look at each of these three factors.
Risk or loss avoidance
People don’t like to lose – in fact, behavior economics tells us that losses loom larger than gains. Meaning, losing $100 feels twice as bad as winning $100. Risk or loss aversion has a major impact to how employees choose benefits.
Some may not want to spend money from their paycheck on coverage they actually need, which can lead to under-insuring. Additionally, some may feel uncomfortable spending money on out-of-pocket costs which can lead to over-insuring.
Status quo bias
Human beings are creatures of habit. We generally don’t like to change things up too much and prefer to stick with what we know. And when it comes to benefits, this means employees make the same decisions they’re comfortable with, even if they aren’t the best fit for their lifestyle.
Sometimes bad decisions yield good results. Outcome bias comes into play when the outcome affects the benefit choice. For example, an otherwise healthy employee with an HDHP plan gets into a ski accident and has a lot of out-of-pocket costs for that year. Although she had money in her HSA account to cover the expenses and that HDHP/HSA combination was a good choice for her, at annual enrollment, this employee may enroll in a higher-cost plan to insulate herself against out-of-pocket costs.
To learn more, download our e-book below to get more insight into what is driving employee benefits decisions.