As the old saying goes, knowledge is power. But according to a growing body of research in a variety of fields, including psychology and medicine, more knowledge doesn’t always lead to better decisions. A new study looking at the health insurance choices of new employees seems to support these findings.

The study, published in Frontiers in Psychology, finds that when young adults, taking their first full-time jobs, are given detailed info about what is covered in different health plans, their choices reflect a cognitive bias called the “compromise effect.” In effect, when offered three plans with varying degrees of event- and procedure-related coverage — low, moderate, and high — the study finds that participants most often gravitate towards the moderate option, or the compromise plan.

“Young people in their first jobs aren’t usually experienced in making decisions about healthcare,” says study co-author and Rotman professor of marketing David Soberman. “And in situations of uncertainty, people tend to gravitate towards a compromise option because it seems safe. But just because it is a compromise, that doesn’t necessarily mean it’s the best option for them.”

Whether employees are in the U.S. picking a full suite of health insurance options or in Canada choosing supplemental coverage to government-backed universal healthcare, they typically make these choices soon after being hired.

Recent research shows that these can be important decisions because the effect of health insurance on health status can compound over time.

Plans usually differ based on the level of coverage, and in the U.S., in particular, this coverage can vary widely. Some plans can have different deductibles or co-pays, different floors when they start to pay, and different ceilings when the plan’s coverage stops. There can also be significant differences in which services are covered and in what the costs are for employees and employers. 

In this study, Soberman and his co-authors Rotman’s Scott Hawkins and INSEAD’s Stephen Chick presented 241 undergraduate students from Toronto and Paris with three hypothetical health insurance plans: a basic coverage plan that has a lower monthly premium and covers a lower percentage of healthcare costs; an enhanced coverage plan that has a moderate monthly premium and covers a moderate percentage of healthcare costs; and a superior coverage plan that has a higher monthly premium and covers a higher percentage of costs.

The participants were asked to imagine they were choosing one of these plans while taking their first full-time job after graduation. One group was given limited details (broad categories) about the health services that would be provided, while a second group was given a more detailed breakdown (including sub-categories) of what would be included in the plan.

The results show that in the low-detail condition, there was a relatively even distribution of participants picking the basic (low), enhanced (medium) and superior (high) coverage plans. But in the high-detail condition, many picked the enhanced plan.

“Now the question becomes: How do we know that providing people with more information creates more uncertainty and drives them to that compromise option?” says Soberman.    

To find out, the researchers asked participants to estimate the total number of insurance claims they thought they would make. They found a much wider level of variance in predicted number of claims by participants who received more detailed information about the healthcare plan compared to participants in the low-detail condition (50 per cent greater variance, in fact). The researchers surmised that if the participants had equal levels of certainty about their choices in the two conditions, there would not be this level of difference in the variance of the expected number of claims across conditions.

So what does all of this tell employees and employers? A few things, says Soberman.

“For one, a big problem that we see is people under-insuring,” he says. “I think the compromise effect in that regard is positive because when you provide more detail about health insurance plans, it can move people away from the lowest level of coverage.”

However, Soberman says he can also imagine that the compromise effect could be used to shift people to select higher levels of health coverage than they may need.

This happens all the time in other product categories as a way to maximize profits, he notes. “Companies often have a certain design of a product that is the most profitable. What they then do is create one design that is slightly over-specified and another that is slightly under-specified. Because people gravitate to the compromise option, it allows the company to manipulate customers the most profitable product.” 

But Soberman hopes the biggest takeaway here is that more does not always mean better. “We sometimes have this belief that providing people with more information helps them make better decisions,” he says. “But I think what this study is telling you is that that’s only true in domains where people are experienced and able to process the information.”