If anyone is a "homo economicus" - that rational decision-maker feted by economics textbooks - it is Damien Waller, chairman and chief
executive of private health insurance intermediary iSelect.
Yet 10 years ago, even this qualified engineer and professional
stockbroker found himself unable to choose a health insurer, despite
combing the brochures of five different funds.
"It was just ridiculous," Waller recalls. "They used different
terminology so you couldn't compare apples with apples. I just thought
if I couldn't do this, how is the average person in the street going
to have any hope of doing it?"
They had no hope, of course. As a Productivity Commission inquiry into
private health insurance reported about the same time: "Consumers
often do not have adequate information to compare funds or even to
know what their insurance covers, due to the complexity of products
... Considerable confusion exists among consumers about the level of
cover, benefits, changes to benefit entitlements and waiting periods."
In 2000, Waller and another engineer David Urpani - who has a PhD in
artificial intelligence - launched iSelect.com.au to make choosing
health insurance easier.
Consumers do not weigh all options equally. Instead, they are
influenced by how options are presented. This explains why, for
example, food makers pay supermarkets to place their products at eye
"Choice architect" is the label United States economist Richard Thaler
and US legal scholar Cass Sunstein apply to the shopkeepers,
designers, marketers and others who organise that context in which
people make decisions.
The University of Chicago academics claim "there is no such thing as a
'neutral' design". They contend: "Cognitive psychology and behavioural
economics have shown that small and apparently insignificant
contextual details can have a major effect on people's behaviour."
Choice architecture in business is not new but its possibilities have
grown with the internet and the proliferation and growing complexity
of insurance and banking products.
At iSelect, Waller is exploiting both developments to build a business
around "nudging" people towards the right health insurance for them.
After entering their age and sex, users are presented with a long list
of options for hospital and extras cover. The site goes a step further
by choosing a default for each. A 25-year-old male, for instance, is
assumed not to require cover for a hip or joint replacement.
Users can override these defaults before being taken to another list,
this time of policies the site's patented technology has decided will
best meet the customer's needs.
These rankings are based on how well an individual policy "scores" on
preferred options. So generous dental benefits will push a policy up
the rankings of a user who has indicated this is a "must-have" cover.
"It doesn't just throw up a basic comparison or a search result,"
Waller says. "It actively matches products to consumers' needs. We are
trying to guide people into the right products that will actually meet
their likely needs."
Defaults and structured choice systems are only two of the tools or
"nudges" available to choice architects. Feedback mechanisms are
another. For instance, US consumer goods giant Procter & Gamble is
developing a toothbrush that reminds people to take prescribed
medicine. Yet another nudge is incentives.
For health insurers, nudging is the most they can do to encourage
policyholders to take better care of themselves.
Government regulations prevent insurers from cutting the premiums of
policyholders who take steps to improve their health. In the case of
heart-attack survivors, insurer Australian Unity uses the incentive of
free one-on-one advice to reduce the chances of another attack.
Since March 2007, Australian Unity policyholders making a claim for a
related condition have been automatically invited to join a six-month
"coaching patients on achieving cardiovascular health" program.
"The carrot we are using is based around information," Australian
Unity health-care group executive Amanda Hagan explains.
"What are the risk factors? What should your target be? And how can
you do things to achieve that and engage with your GP in that
A three-in-four acceptance rate has led Hagan to set up a similar
program for osteoporosis sufferers.
The rising complexity of the choices consumers face is also apparent in banking.
Consider loan interest rates. The national Consumer Credit Code
requires all credit providers to publish a "comparison rate" alongside
the nominal rate they charge. The problem for consumers is that the
comparison rate incorporates some fees and charges (such as
application fees) but not others (such as exit fees).
To get around such anomalies, Thaler and Sunstein propose a battery of
comparative data. In the case of credit cards, issuers would be
required to make available to card holders two secure electronic
The first would list all the ways in which a customer can be charged,
including for missing a payment or transacting in foreign currencies.
The second file would be a list of all the actions the customer made
in the past year that incurred a charge.
"To be sure, most consumers would not read these files in any detail,"
Thaler and Sunstein concede. "Instead we anticipate that new
third-party websites would compete for the business of distilling the
information in the files."
These websites could show consumers how to save money by changing
their behaviour - for example, by paying the balance in full each
month - and point them to alternative providers that, given their past
behaviour, offer consumers a better deal.
Thaler and Sunstein, whose ideas are reported to strongly influence
the policy thinking of new US president Barack Obama, acknowledge that
firms may also "find it profitable to nudge people in ways that are
Even so, they believe there are "many great business opportunities for
firms to play the role of honest broker, but to do well in that domain
it will be necessary to be rigorously scrupulous".
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