simplifying complex decision-making
I recently took on a new job as a market researcher. On my very first day, I was faced with a monumental task that would take all my analytical skills, education, and powers of perception: signing up for employee benefits.
I am no stranger to complexity and jargon; yet, signing up for benefits is one of the most complicated things I have ever done.As a former academic, I am no stranger to complexity and jargon; yet, signing up for benefits is one of the most complicated things I have ever done. It’s hard to believe hundreds of millions of Americans have found themselves in the position of signing up for benefits given how shockingly unwieldy they are.
When I’m contributing to my 401K, what percentage of my bimonthly paycheck is reasonable? 10%? 20%? 50%? Should my contributions be pre-tax? After tax? Should I get a Roth IRA? Which investment plan should I put my money in? I guess that depends on whether I’m planning to retire at 55, 60, 65, or 70, since the portfolios associated with each are employing different risk strategies. Which health insurance plan should I get? Should I get the one that has a $1500 deductible or the one with a $1000 deductible? It’s going to be important because beyond the initial deductible, the percentage of co-pay is going to change between in-network and out-of-network doctors. Should I pick the dental PPO or the HMO? One costs half as much as the other, but there’s a difference between how each takes care of major restorative work, and also if I pick the HMO, it doesn’t pay for dentures, should I need them. Vision care seems awfully expensive given that I may or may not even get new glasses this year. But then, what happens if I need new glasses? They are pricy, what with frames alone costing $150, for reasons that have never been clear to me.
Despite that dense paragraph of choices I just dumped out above, my options are actually fairly limited at this company; at the University of California, where I once worked, there were many, many more options for every piffling detail. I was handed a book that was literally 200 pages long that detailed all the available options in health insurance. Each option had a 2-3 page summary.
We all know that what I’ve just described is crazy. I’m fairly well educated, I have experience reading complex documentation, and I have business acumen that should allow me to make somewhat rational economic decisions based on my own particular set of circumstances. But let’s face it: few people are going to be able to make sense of all this information, especially at a time when one needs to be focusing one’s energies on learning the new work environment. Yet the proliferation of legalese, fine print minutiae, and paperwork across HR desks continues unabated, and most of us have just come to accept it as a nuisance that we deal with but mostly stay ignorant of.
Rather than an opt-out program that forces complex comparisons, I would offer a decision tree, which offers a logical process to eliminate choices.In their pop-lit behavioral economics book Nudge, Richard Thaler and Cass Sunstein argue that the solution is to create a default “best choice” option for employees that no one actually has to sign up for. Instead of presenting employees with a choice at the beginning, employees have to switch from this option, which is designed to make the most sense for the most people. So even if it’s not the best choice for someone’s particular set of circumstances, they’re also most likely not being completely screwed by it either— something that actually is a risk when someone is presented with choosing from 50 options, where they might make a horrible choice or might put off doing anything altogether.
It sounds good in theory, and the way Thaler and Sunstein present this concept (with the curiously offputting name “Libertarian Paternalism”), it seems like it would prevent a lot of people from making bad decisions. It’s true that it cuts down heavily on cognitive demands, but this is not an ideal setup for a number of reasons:
- It encourages employees to remain ignorant about things that they really should be invested in
- It empowers one person or a group of people within a bureaucracy to make a judgment about what is best for an entire class of people
- It could invite abuse, since the people in charge of creating the default position could have ulterior motives that don’t best serve employees
- What does “best” mean, and what are the metrics used to arrive at a consensus?
Questions like “Would you rather A) spend an extra $500 if you end up in the hospital, or B) pay $250 in advance regardless of whether you go to a hospital” would force you to make tough decisions about what you are willing to compromise, instead of making you compare features.To alleviate some of the problems inherent in this, I would offer another method: a decision tree. This tree would be something an individual or family could go through to arrive at optimal choices based on their own priorities. Obviously, the specifics would be dependent on the distinctions of the plans themselves, but it would offer a logical process to eliminate choices. Further, the abstract details of features will be bypassed in favor of the utilitarian concerns that underlie them.
For example, asking a series of questions like “Would you rather a) spend an extra $500 if and when you end up in the hospital, or would you rather pay $250 in advance regardless of whether you go to a hospital” takes a lot of the cognitive effort out of the selection process because it’s stating the cost-benefit explicitly and is highlighting the essential trade-off. In marketing lingo, this is called a conjoint analysis. The tradeoffs are presented upfront— forcing you to make tough decisions about what you are willing to compromise. Ultimately, this process allows you to decide what is right for you given a portfolio of choices that are otherwise hard to compare. Answer enough ‘trade-off’ questions and you’re bound to find the right plan for you, provided your choices are internally consistent.
At this point, it’s not a process of laboriously comparing— something that humans are not very good at, according to countless studies— but a process of elimination based on objectives and personal philosophy. I hope that the next time I’m saddled with having to sign up for benefits, someone in an insurance company or in HR actually follows through with a program like this.