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How Behavioral Psychology is Fixing Modern Insurance Claims

3 minutes, 56 second read

Human Behavior is inherently hard to predict and mostly irrational. Infact, this irrationality is often overlooked because it offers no meaningful insight or patterns behind our motivations. 

In the early 70’s, Israeli-American economist Daniel Kahneman challenged the assumption that humans behave rationally when making financial choices. His research explored the fundamentals of how people handle risk and display bias in economic decision-making. He would later be awarded the Nobel Prize for his pioneering work which provided the basis for an entirely new field of study called Behavioral Economics

Standard Economics assumes humans behave rationally, whereas Behavioral economics factors in human irrationality in the buying process.

Along with another scientific approach to studying natural human behaviors (Behavioral Science), both these fields became particularly useful to the financial industry early on. By understanding the deep seated motivations behind people’s choices, a specific interaction can be designed to influence an individual’s behavior — also known as behavioral intervention.

By finding meaningful patterns in Big Data, usually performed by a data scientist, businesses are able to leverage analytics and behavioral customer psychology. The outcomes of these insights can help business owners learn about the customer’s true feeling, explore behavioral pricing strategies, design new experiences and retain more loyal buyers. This is why Behavioral Scientists have become highly sought after over the last decade. 

The Rise of the Behavioral Scientist

Take for instance Dan Ariely, who is a Professor of Psychology & Behavioral Economics at Duke University, and also serves as the Chief Behavioral Officer of Lemonade — the World’s biggest Insurtech. Ariely observes that human behavior is ‘predictably irrational’ and constantly exhibits ‘self-defeating’ characteristics. There is a lot of value in studying these behaviors, for many organizations, to encourage positive ones, dissuade dishonesty and improve the underlying relationship.

The ‘dissuading dishonesty’ part is particularly useful for Insurance carriers. For a business that fundamentally deals with both people and risk, Insurance is endlessly plagued by fraud. Insurance fraud losses were estimated around $80B in 2019 alone. On the other hand, legitimate claim instances can at times be overlooked due to the lack of evidence or nuances in the finer policy details. 

To combat fraud during the claims process, Ariely added a simple ‘honesty pledge’ agreement before the beginning of the claims intimation process. A customer signs the digital pledge, and is then asked to record a short video explaining the incident for which they are requesting the claim.

The process seems naive but it’s backed by tons of data and science — a byproduct of decades of research work put into psychology and behavioral economics. 

So, How are claims being driven by data science?
How do insurers capture honesty from their customers?
The answer is priming.

By enforcing an honesty pledge, Lemonade was able to bring down the likelihood of fraudulent claims being intimated for. In other words, they made it harder for customers to lie. The hypothesis that works is: Don’t blame people for mistakes in decision making, it’s on the designers of the system

After the customer got done with their video recording, Lemonade ran 18 anti-fraud algorithms against the claim to check its veracity and a payment was made in a few seconds. 

Behavioral Priming in Insurance

Behavioral work is built on strong academic research that identifies aspects that influence the  buying process. ‘Nudges’ are a perfect example of behavioral priming at work. Nudge theory (a concept within Behavioral Science) identifies positive reinforcement techniques as ways to influence a person’s behavior and ultimately their decision-making.

For example, according to a study published in the Journal of Marketing Research, research subjects who were shown an aged image of their faces allocated twice the amount to their retirement savings when compared to people who were shown images of their current younger selves.

In this case, the ‘nudging’ technique was effective in driving retirement planning behavior among the test group. 


Source: Centre for Financial Inclusion

Behavioral Economics also stipulates that once you start doing something, you are more likely to continue doing so. This is how Netflix uses subtle nudges on their platform, where after each episode a prompt asks if you would like to continue watching the show.

Deriving New Value

Swiss Re’s Behavioural Research Unit outlines five promising areas where behavioral economics can create new value for insurers.

Digital businesses are gradually realizing the limitations of human and machine systems without any real intelligence or computing power behind it. Between human prone errors and the scalability challenges of traditional technologies, a new mechanism is required to learn and adapt better. 

Behavioral Science interventions in insurance can help carriers align their strategies with the true needs of their customers. Using the insights posited from advanced machine learning models, the right behavioral intervention can bring about changes to real-world insurance demand behavior that closely matches the benchmark model.

Also read – how InsurTech beyond 2020 will be different?

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Machines That Make Up Facts? Stopping AI Hallucinations with Reliable Systems

There was a time when people truly believed that humans only used 10% of their brains, so much so that it fueled Hollywood Movies and self-help personas promising untapped genius. The truth? Neuroscientists have long debunked this myth, proving that nearly all parts of our brain are active, even when we’re at rest. Now, imagine AI doing the same, providing information that is untrue, except unlike us, it doesn’t have a moment of self-doubt. That’s the bizarre and sometimes dangerous world of AI hallucinations.

AI hallucinations aren’t just funny errors; they’re a real and growing issue in AI-generated misinformation. So why do they happen, and how do we build reliable AI systems that don’t confidently mislead us? Let’s dive in.

Why Do AI Hallucinations Happen?

AI hallucinations happen when models generate errors due to incomplete, biased, or conflicting data. Other reasons include:

  • Human oversight: AI mirrors human biases and errors in training data, leading to AI’s false information
  • Lack of reasoning: Unlike humans, AI doesn’t “think” critically—it generates predictions based on patterns.

But beyond these, what if AI is too creative for its own good?

‘Creativity Gone Rogue’: When AI’s Imagination Runs Wild

AI doesn’t dream, but sometimes it gets ‘too creative’—spinning plausible-sounding stories that are basically AI-generated fake data with zero factual basis. Take the case of Meta’s Galactica, an AI model designed to generate scientific papers. It confidently fabricated entire studies with fake references, leading Meta to shut it down in three days.

This raises the question: Should AI be designed to be ‘less creative’ when AI trustworthiness matters?

The Overconfidence Problem

Ever heard the phrase, “Be confident, but not overconfident”? AI definitely hasn’t.

AI hallucinations happen because AI lacks self-doubt. When it doesn’t know something, it doesn’t hesitate—it just generates the most statistically probable answer. In one bizarre case, ChatGPT falsely accused a law professor of sexual harassment and even cited fake legal documents as proof.

Take the now-infamous case of Google’s Bard, which confidently claimed that the James Webb Space Telescope took the first-ever image of an exoplanet, a factually incorrect statement that went viral before Google had to step in and correct it.

There are more such multiple instances where AI hallucinations have led to Human hallucinations. Here are a few instances we faced.

When we tried the prompt of “Padmavaat according to the description of Malik Muhammad Jayasi-the writer ”

When we tried the prompt of “monkey to man evolution”

Now, if this is making you question your AI’s ability to get things right, then you should probably start looking have a checklist to check if your AI is reliable.

Before diving into solutions. Question your AI. If it can do these, maybe these will solve a bit of issues:

  • Can AI recognize its own mistakes?
  • What would “self-awareness” look like in AI without consciousness?
  • Are there techniques to make AI second-guess itself?
  • Can AI “consult an expert” before answering?

That might be just a checklist, but here are the strategies that make AI more reliable:

Strategies for Building Reliable AI

1. Neurosymbolic AI

It is a hybrid approach combining symbolic reasoning (logical rules) with deep learning to improve factual accuracy. IBM is pioneering this approach to build trustworthy AI systems that reason more like humans. For example, RAAPID’s solutions utilize this approach to transform clinical data into compliant, profitable risk adjustment, improving contextual understanding and reducing misdiagnoses.

2. Human-in-the-Loop Verification

Instead of random checks, AI can be trained to request human validation in critical areas. Companies like OpenAI and Google DeepMind are implementing real-time feedback loops where AI flags uncertain responses for review. A notable AI hallucination prevention use case is in medical AI, where human radiologists verify AI-detected anomalies in scans, improving diagnostic accuracy.

3. Truth Scoring Mechanism

IBM’s FactSheets AI assigns credibility scores to AI-generated content, ensuring more fact-based responses. This approach is already being used in financial risk assessment models, where AI outputs are ranked by reliability before human analysts review them.

4. AI ‘Memory’ for Context Awareness

Retrieval-Augmented Generation (RAG) allows AI to access verified sources before responding. This method is already being used by platforms like Bing AI, which cites sources instead of generating standalone answers. In legal tech, RAG-based models ensure AI-generated contracts reference actual legal precedents, reducing AI accuracy problems.

5. Red Teaming & Adversarial Testing

Companies like OpenAI and Google regularly use “red teaming”—pitting AI against expert testers who try to break its logic and expose weaknesses. This helps fine-tune AI models before public release. A practical AI reliability example is cybersecurity AI, where red teams simulate hacking attempts to uncover vulnerabilities before systems go live 

The Future: AI That Knows When to Say, “I Don’t Know”

One of the most important steps toward reliable AI is training models to recognize uncertainty. Instead of making up answers, AI should be able to respond with “I’m unsure” or direct users to validated sources. Google DeepMind’s Socratic AI model is experimenting with ways to embed self-doubt into AI.

Conclusion:

AI hallucinations aren’t just quirky mistakes—they’re a major roadblock in creating trustworthy AI systems. By blending techniques like neurosymbolic AI, human-in-the-loop verification, and retrieval-augmented generation, we can push AI toward greater accuracy and reliability.

But here’s the big question: Should AI always strive to be 100% factual, or does some level of ‘creative hallucination’ have its place? After all, some of the best innovations come from thinking outside the box—even if that box is built from AI-generated data and machine learning algorithms.

At Mantra Labs, we specialize in data-driven AI solutions designed to minimize hallucinations and maximize trust. Whether you’re developing AI-powered products or enhancing decision-making with machine learning, our expertise ensures your models provide accurate information, making life easier for humans

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