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Insurance decision-making for rare events : the role of emotions

Author: Howard Kunreuther; Mark V Pauly; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2015.
Series: Working paper series (National Bureau of Economic Research), no. 20886.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
This paper describes the results of a web-based multi-period insurance purchasing experiment focusing on how individuals make insurance choices for low-probability, high-consequence events. Participants were told the probability and resulting losses of a hurricane occurring and were informed that these were stable from period to period. We contrast the model of informed expected utility [E(U)] maximization with  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Howard Kunreuther; Mark V Pauly; National Bureau of Economic Research,
OCLC Number: 903221966
Notes: "January 2015"
Description: 1 online resource (19 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 20886.
Responsibility: Howard Kunreuther, Mark Pauly.

Abstract:

This paper describes the results of a web-based multi-period insurance purchasing experiment focusing on how individuals make insurance choices for low-probability, high-consequence events. Participants were told the probability and resulting losses of a hurricane occurring and were informed that these were stable from period to period. We contrast the model of informed expected utility [E(U)] maximization with alternative behavioral models of choice as explanations for what we observe. The majority of individuals (63 percent) behaved in ways that were consistent with expected utility theory, although we do not know whether these individuals were utilizing other decision rules. A sizeable number of uninsured individuals decided to purchase insurance after learning that they had suffered a loss and revealing that they were unhappy about having been uninsured. In this sense, the study shows that a loss coupled with emotions is likely to play an important role in convincing an uninsured person to buy coverage. In contrast, insured individuals who did not suffer a loss rarely dropped coverage. The paper concludes by raising questions regarding the welfare implications of this behavior.

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