Working Paper: NBER ID: w12446
Authors: David H. Krantz; Howard C. Kunreuther
Abstract: Protective decisions are often puzzling. Among other anomalies, people insure against non-catastrophic events, underinsure against catastrophic risks, and allow extraneous factors to influence insurance purchases and other protective decisions. Neither expected utility theory nor prospect theory can explain these anomalies satisfactorily. We propose a constructed-choice model for general decision making. The model departs from utility theory and prospect theory in its treatment of multiple goals and it suggests several different ways in which context can affect choice. To apply this model to the above anomalies, we consider many different insurance-related goals, organized in a taxonomy, and we consider the effects of context on goals, resources, plans and decision rules. The paper concludes by suggesting some prescriptions for improving individual decision making with respect to protective measures.
Keywords: No keywords provided
JEL Codes: G22; H23; H44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| context activates goals (L21) | decision outcomes (D70) |
| emotional attachment to possessions (D14) | insurance against non-catastrophic losses (G52) |
| lack of perceived urgency (E66) | underinsuring against catastrophic risks (G52) |
| social norms (Z13) | underinsuring against catastrophic risks (G52) |
| irrelevant factors (D91) | deviate from optimal financial strategies (G40) |