Estimating Costs – Are you under insured?

With under insurance such a recurring topic, we’ve asked Cheshire hypnotherapist John McKenzie to provide an insight into the psychology behind estimating the value of our possessions.  By explaining the reasons people tend to make mistakes, and giving practical steps to overcome them, our aim as always is to prevent our clients falling victim to under insurance.

The Sydney Opera House was due to open in 1963 at a cost of $7 million.  Instead it opened at over 14 times that cost and a decade late.  The effects of that were embarrassing – but if you make the same mistake about estimating your contents insurance the consequences can be much worse than just embarrassment.

So why are we so bad at estimating costs, and more importantly how can we be better at it when it matters?

To demonstrate why we’re so bad at estimating costs let’s try an experiment now.  Choose either the kitchen or the tool-shed, and list all of the items in it. When you’ve finished move onto the next paragraph.

Now you have your list keep it in front of you and take yourself step-by-step through making a meal or doing a DIY job in the house.  The only rule is that you can only use the items on your list.  Try it now before reading the next paragraph.

What by far the majority of people find is that they soon come across something that they can’t do, because they’ve overlooked something.  Whether it’s a measuring spoon or a spanner, imagine the frustration of that effect being repeated in every task you do, in every room in your house.

The psychology behind our trouble in estimating costs boils down to three reasons:

The psychology behind our trouble in estimating costs boils down to three reasons:

  • Availability – we tend to be swayed by what’s in front of us or most obvious. Thinking about the kitchen and tool-shed experiment, how many items have you forgotten about at the back of cupboards, or on high shelves?
  • Anchoring – once we’ve got one cost in mind, no matter how arbitrarily we’ve arrived at it, we peg other costs around it. That’s why underestimating the cost of just one item at the beginning can have such wide repercussions.
  • Optimism – we tend to think that we’ll be okay, and that we won’t face difficulties or situations again. Think of the items at the back of kitchen cupboards or on tool-shed shelves that you might only use once a year, but which you would struggle to do without.

So now you understand the reasons why we’re so poor at estimating costs, what can you do to make sure that you aren’t caught out?

I’d suggest five ideas to bear in mind:

  1. Don’t think that knowing you’re likely to under-estimate costs will in itself make you more accurate. Estimating costs is subject to Hofstadter’s Law, which states “It’s always more than you estimate, even when you take into account Hofstadter’s Law”.
  2. Stop thinking of “estimating” and start thinking of “valuing”. Thinking of “estimating” costs lets you off the hook, and allows you accept inaccurate and incomplete costs.  Thinking of it as “valuing” will make you more rigorous in your approach.
  3. Be rigorous and methodical. Go through each room, cupboard by cupboard and drawer by drawer.  Don’t forget garages, outbuildings, sheds and stables as well.  Make notes of what you have, and what you want to insure, and make sure you do it in a way that you can revisit and add to as time passes.
  4. Research current values or replacement costs properly, and don’t settle for your own guess based on knowledge or experience. Make sure that high value and specialist items are all recorded, and all explicitly declared to your insurer.
  5. Finally make sure that your list, plus any photographs and copies of receipts, are backed up safely on the cloud, or off site. Our experiment with the kitchen or tool-shed was hard enough – imagine doing that for real, and without your list.

If this has prompted you to think about your insurance, or to more realistically value your belongings, then the next step would naturally be to contact the experts at County Insurance for advice and a quote.

If Cheshire hypnotherapist John McKenzie has got you thinking about your insurance and you have some questions for our team, don’t hesitate to get in contact with us. We will be more than happy to find you the right level of cover at a great price. Call our expert team on 0333 400 2316 or you can visit your local branch.