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Biological and Psychobehavioral Correlates of Risk Taking

Washington state study (1968): within the group with a history of no automobile accidents, 64% had good credit and 35% had bad credit-- among group ...

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Biological and Psychobehavioral Correlates of Risk Taking

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    Slide 1:Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works Patrick Brockett (brockett@mail.utexas.edu), and Linda Golden (mkllg@mail.utexas.edu)

    Presentation to the Casualty Actuarial Society Predictive Modeling Conference on October 11, 2007, Las Vegas, Nevada

    Slide 2:Reference for details:

    Brockett, Patrick L. and Linda L. Golden “Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works,” Journal of Risk and Insurance, Vol 74(1), March 2007. 23-63. Available electronically from JSTOR, Blackwell Publishing, accessible from www.ARIA.org, or by emailing the authors 75 Copies available at the meeting

    Slide 3: The most important development in the past two decades in personal lines of insurance may well be the use of an individual’s credit history as a classification and rating variable to predict losses.

    Slide 4:Empirical Relationship Demonstrated The statistical evidence between insured losses and credit score has been repeatedly demonstrated. Very strong correlation between a bad credit score and increased insurance losses. Research Examples. . . . . .

    Excerpted from University of Texas study conducted for Texas legislature, 2003 Excerpted from University of Texas study conducted for Texas legislature, 2003

    Slide 7:Tillman and Hobbs (1949): drivers with bad credit history have repeated crashes at a rate six times higher than those with good credit history. Washington state study (1968): within the group with a history of no automobile accidents, 64% had good credit and 35% had bad credit-- among group with two or more automobile accidents, 35% had bad credit, -- almost twelve times the percentage (3%) who had good credit Other correlates: divorce, legal problems, job turnover, lower education

    Slide 8:“…a man drives as he lives.”

    Tillman and Hobbs, 1949 Research Results Summarized

    Slide 9:The purpose of this research is to present a “missing link” explaining why credit scores are associated with insurance losses. The outcome of the debate over the use of credit scoring has implications for the social acceptability of Actuarial Standard #12, and has implications for other variables useful for underwriting.

    Slide 10:Heuristic Model

    Insured Loss = f(X1,X2) Credit Score = g(Y1,X2) Where: X1 denotes a vector of automobile specific characteristics, X2 denotes a vector of person specific psychological (and possibly biological) characteristics, and Y1 denotes a vector of credit specific attributes Proposition: The correlation between Insured Losses and Credit Score is high and positive because of the common vector factor X2 (which is in turn correlated with both X1 and Y1 ).

    Simplified Model of Conjunctive Influences between Insured Losses and Credit

    Slide 12:The Core Idea

    Connector between risk taking behavior in automobile insurance losses and credit scores and financial risk taking is the psychological dimension. Most easily identified psychological characteristic is the personality type known as “sensation seeking” or “novelty seeking.” It is related to responsibility and risk taking.

    Slide 13:Psychobehavioral Profile of Sensation Seeking/Novelty Seeking

    Slide 14:“If serotonin is the brakes, dopamine is the accelerator in the drive to risky behavior.”

    Zuckerman and Kuhlman, 2000 A Biological Component

    Slide 15:Biochemical and Psychobehavioral Profile of Sensation Seeking/Novelty Seeking

    Slide 16: Influences on sensation seeking and novelty seeking have implications for automobile insurance losses.

    Slide 17:Comprehensive Overview of Biochemical and Psychobehavioral Influences Related to Paid Automobile Insurances Losses

    Slide 18: Financial decision making is also related to psychobehavioral and biochemical variables.

    Slide 19:Brown and Harlow (1990) examined blood samples and determined that financial risk taking is related to blood chemistry. Other research has shown sensation seeking/novelty seeking is related to financial decision making……….

    Slide 20:Reduced risk perception and risk appraisal play an important role in the individual’s propensity for sensation seeking which, in turn, is an integral part of the individual’s financial decision making. Risk tolerance is evident in both the filing of insurance claims and excessive credit card use (impulse buying which may be linked to MAO and dopamine or financial stress linked to serotonin, cortisol, dopamine, and norepinephrine). Debt and poor money management create and are the result of financial stress which may be linked to serotonin, cortisol, dopamine, and norepinephrine. Each of these decisions directly impacts the individual’s credit score which is often used as a variable in predicting losses in automobile insurance coverage. Miraplex and chemically induced risk taking

    Slide 21:…and financial decision making determines, in part, a person’s credit score…

    Slide 22:Comprehensive Overview of Biochemical and Psychobehavioral Influences Related to Credit Score

    Slide 23: Notice that: The same risk taking correlates show up across realms from driving to financial decision-making. Why?

    Slide 24:Possible Theoretical Explanations Risk Homeostasis Theory: all behaviors hold some level of risk and the challenge of driving is to maximize the overall benefits of the behavior. The driver learns to adjust behaviors when a discrepancy is observed between the observed level of risk and the target level of risk. (Burns and Wilde 1995; Wilde 2002)

    Target Risk Theory: an adaptation of risk homeostasis that necessitates the adjustment of driving behavior so that perceived risk is in line with target risk. (Wilde 2002)

    Slide 25:The biochemical mechanisms coupled with Wilde’s Homeostasis Theory suggests an intrinsic biological mechanism at play in the relationship between risk taking and behavior of all types.

    Slide 26:Irrespective of the viability of theoretical explanations, we can graphically summarize the biochemical and behavioral commonalities between credit scores and insured loss generation. . . .

    Slide 27:Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses

    Putting All The Relationships Together, We Have . . .

    Slide 28:Thank you very much for your attention. Questions? Comments?

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