Outcome bias

A bad outcome is likely to make us more likely to think we made a bad decision, and a good outcome is more likely to make us think we made a good decision. This bias is particularly relevant to insurance contracts, as it leads people to regret paying an insurance premium in the event that they do not have to claim.

Pension plans considering longevity insurance should be wary of this bias. Longevity insurance, whether in the form of a buy-out or a longevity swap, seeks to replace an uncertain set of cashflows (dependent on the ultimate lifespan of the plan’s participants) with a fixed set of cashflows. If a pension plan decides to take out longevity insurance, the decision should not be judged by whether plan participants actually end up living longer or shorter lives than predicted. The decision should be judged on the increased security gained from the certain cashflows together with the cost of the premium.