Lemonade Chief Behavioral Officer Dan Ariely Talks Trust at Money20/20

let us to think about this I want to describe to you an experiment in this experiment we set up a free money booth we set up a booth we said free money and then below it when it says xxx we changed the numbers sometime it was $1.00 Sunday this was 5 sometimes 10 it was in a big commercial center and we just measured what percentage of people took the money this is all they had to do what percentage do you think people took the money let's say when it was $20 what percent do you think took it so we changed it we have $1 5 10 20 and 50 the 10 condition 9% took it was slightly better as the money goes up this is very bad right this is their this is this is terrible right this means that even when you give free money even when it's 50 dollars less than 20% of the people come and take it right by the way if one person took it and then they call their friends with encounter because that's a different story now it's about social networks and how people trust each other but if you just say there's free money out there now think about free money as the metaphor how often do we do things for people that are in their benefit do people trust us we're in a terrible situation in society when we have very very low level of trust and we have to think about how to fix it it's not just about money it's about realizing that if we have society with no trust it creates tremendous inefficiencies ok so that's the first thing so let me tell you why I think Trust is so important there's a game called the public's good game and here's how the game works you pick 10 people let's say in Amsterdam they each we know their address they don't know the other people who are playing it's anonymous and every day they wake up and you give them each 10 euros they wake up and they have 10 euros and then they can do one of two things with those 10 euros they can either keep them to themselves or they can put it in the common pot and they keep it to themselves are they putting the common pot now if they put it in the common pot during the day the money multiplies five times and in the evening distributed equally by everybody so imagine it was you you wake up you have 10 euros you say I can keep the money for myself then I have 10 euros I could put it in a central pot if I put in the central boil it multiplies five times equally divided by everybody now what happens when you play this game day number one 10 people 10 euros they all put the money in 10 people 10 euros $100 by the evening it's multiply five times now we have 500 euros and then everybody gets 50 euros life is good that's what it means to live in a good society right we do something these benefit of the whole society everybody benefits now this goes on for a while when you play this game and then at some point there's one person who put zero in right you probably have an idea of who that will be from your friends you know there's somebody who puts nothing in now what happens nine people put 10 euros in 90 euros multiply 5 times 415 the evening everybody gets 45 euros including the guy who put nothing in because freeriders also benefit from the social good but that person has 55 euros that person betrayed the social good for their own selfish benefits right now what do you think happened the next day nobody puts anything and in economics we think about this game as having two equilibria there's one equilibria that everybody participates in everybody benefits there's one equilibria that nobody participates and nobody benefit there's no middle point it's not like half the people put and half the people don't that's not stable it goes either to zero or to a hundred now the good solution the good resolution the good equilibria is very fragile it's enough for one person to deviate and it goes down to zero the bad equilibrium is very stable if all of a sudden two people start participating it doesn't help anything and this I think is the metaphor for trust when we have trust and you can give your money to other people and you know that things will be paid and I know that if something is going wrong they'll take the money back everybody benefits but when we have a few players who are starting betray the social good nobody wants to be a sucker the equilibrium goes to zero very very quickly and that's why I think Trust is so important it means it's a public good it's means that when we have trust everybody else everybody benefits and it also means that when people betray the public good it's not about their one action that person who put zero and it wasn't just about at one time it was about actually influencing the whole system in a negative in a negative way so how can we increase trust what can we do to increase trust I'll give you one example so a few years ago we we started a small insurance company called lemonade and when we start thinking about insurance we thought the building is in the following way we say let's think about this structure of insurance what happens you have a customer and you have the insurance company every month or twice a year or once a year the customer pays the insurance company they pay they pay they pay at some point something bad happens and what does the insurance company's supposed to do to pay us back as customers but the insurance company has their own financial incentives and what would they prefer to pay or not to pay they prefer not to pay so what happened is that we as consumer pay pay pay when it's time to take the money back the insurance company prefers not to pay now and don't mean that they are evil but somebody would get a bigger bonus if they don't pay there's financial incentives that basically creates a bias if you're getting paid more when you reject more claims it's hard not to reject more claims and then now the consumers know that the insurance company doesn't want to pay us back so what do we do we exaggerate we say they're going to pass 25% less so maybe increase my claim by 25% my television I don't think it was 30-inch must have been 45 and the insurance company knows that consumer exaggerate so what do they do they make it hard the paperwork is in comprehensible difficult everything is more comprehensive now if you think about this as a design it's based on conflicts of interest mistrust and dishonesty right that's that's not the system that you want conflicts of interest people cheated and so on so we said okay that's a bad design it's just a bad design nobody trusts each other the whole incentive structure is wrong what should we do so we said what if we change the game from a two-party game to a three party game what if we said to people pay us every month whatever you paint we will pay claims back and we will take a fixed amount we're not taking not dependent on how much claims we pay or not pay and if we have money at the end of the year it goes to the charity so imagine all of you join lemonade under the Hospice of the World Wildlife Fund we take money from you we pay claims if there's money left over the end of the year the World Wildlife Fund gets it now think about it what does it mean if you cheat who are you cheating your favorite charity we are basically took ourselves out of the equation by becoming an uninterested party of just taking a fixed percentage and now everything any marginal effect is between you and the charity that you that you are hopefully love so we started this not too long ago and a few weeks after we started we got an email from a guy the says hey I had to claim I lost my laptop you paid me for it but I found it and he said how do I return the money how many of you work for insurance companies just raise your hands nobody I don't believe that but but it's consistent with how insurance companies work but not being perfectly honest I called my friends at insurance companies and I say how often does it happen to you and what's your procedure they don't have a procedure just never happened never happened and we have quite a few of those now I'm not saying that everybody is perfectly honest with us but I'm saying that creating a structure that increases trust actually has returns we can be at the good equilibrium where we trust and get trust back and we can be at the bad equilibrium I think insurance companies and actually financial institution in general have been under a fear model of some medieval cheaters that have gone to kind of a bad equilibria and I think there is a better equilibrium okay so I told you about some some some outcomes

Channel: Lemonade

Views: 4,785

Rating: 4.8117647 out of 5

Keywords: behavioral economics, trust, insurance, Lemonade insurance, conflict of interest, dan ariely

Id: m2gnHtlVIj4

Length: 10min 2sec (602 seconds)

Published: Wed Jul 04 2018