Magical thinking and insurance: Taking out cover makes us feel that misfortune is less likely to occur

By Matthew Warren

We’re all prone to a bit of magical thinking now and then. Maybe you try not to step on cracks in case it brings bad luck, or avoid talking about a good situation in case you “jinx” it — even though in reality there’s no way your actions would have any effect on the world.

When it comes to decisions about finances and risk, though, you’d probably claim to be a much more rational thinker. However, a new study in Personality and Social Psychology Bulletin finds that we’re even susceptible to magical thinking when taking out insurance. The team finds that insuring against the loss or damage of a valued possession has what they call a “talisman effect”, making us feel that the misfortune is actually less likely to occur in the first place.

In the first study, Robert Schindler from Rutgers University and colleagues asked participants to think about an object they had bought for around $100 and that held sentimental value. They imagined taking a holiday for two weeks and renting out the object. Some participants were told they were guaranteed full compensation for loss or damage, while the other participants were given no additional information. Finally, all participants rated the likelihood that their possession would be lost or damaged.

Participants who read about the guarantee thought it less likely that their special object would be damaged (they also thought it was less likely to be lost, though this effect didn’t reach statistical significance). This doesn’t make logical sense, of course: coverage against damage doesn’t mean that the damage is any less likely to happen.

The researchers then looked more directly at the effect of taking out insurance. Participants in this study again thought about a treasured possession, and imagined that they were taking this with them as they moved house. Some participants also read that they had purchased full-coverage shipping insurance from a good company, while others received no extra information.

Those who read that they had taken out insurance again believed it less likely that their object would be damaged or lost compared to the other participants. These people also reported a lower level of anxiety about the potential loss or damage of their object, and this seemed to be partly driving their feelings that they were protected against misfortune.

Using a similar methodology, a third experiment showed that these feelings of anxiety were reduced by taking out insurance from a reputable company, but not from one that was poorly rated. And only participants in the first group showed the talisman effect, believing it less likely that their property would be lost or damaged.   

A final study found that participants in an insured group didn’t just have a reduction in anxiety — they also had fewer negative thoughts about a mishap occurring to their object. We know from other work that more frequent thoughts about an event make it seem more likely to occur, so this could be the mechanism behind the talisman effect. That is, the peace of mind offered by insurance makes us think less often about bad things occurring — and the less we think about them, the less likely we believe they are to actually happen.

The results are worth bearing in mind when considering whether to insure something. Are there good reasons for taking out cover, such as protection against a large financial loss? Or is it possible that you are being motivated by a false sense that insurance will make misfortune less likely to occur?

They also have implications for the insurance sector, the authors write. In particular, insurance companies should not be allowed to imply that their products can actually ward off negative events. The team points to the example of a real health insurance policy called “CancerGuard”: clearly, taking out insurance can’t protect us against getting cancer, but a name like this could play into the kind of magical thinking highlighted in the study.

Anxiety, Cognitive Availability, and the Talisman Effect of Insurance

Matthew Warren (@MattBWarren) is Editor of BPS Research Digest

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