Working Paper: NBER ID: w20886
Authors: 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.
Keywords: Individual decision-making; Choice under uncertainty; Multiyear insurance; Disasters
JEL Codes: C90; D12; D60; D81; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| experiencing a loss (J17) | feeling regret (Y60) |
| feeling regret (Y60) | purchasing insurance (G52) |
| experiencing a loss (J17) | purchasing insurance (G52) |
| not suffering a loss (D14) | higher level of 'feel' (Y50) |
| higher level of 'feel' (Y50) | less likely to switch to being uninsured (G52) |