Low-probability insurance decisions: The role of concern

On the basis of a real high stakes insurance experiment with small probabilities of losses, we demonstrate that concern is a more important driver of WTP for insurance than subjective probability estimates when there is ambiguity surrounding the estimate. Concern is still important when probabilities are exactly given. It also helps explaining the low probability insurance puzzle well known from the literature, where a part of individuals pays too much and a part nothing for coverage, a result we are able to replicate. In our experiment, belonging to either the group of threshold persons or to those that pay far too much, is not related to probability judgments but to the degree an individual is concerned in our decision situation.

[1]  P. Slovic,et al.  The affect heuristic , 2007, European Journal of Operational Research.

[2]  M. Degroot,et al.  Measuring utility by a single-response sequential method. , 1964, Behavioral science.

[3]  Howard Kunreuther,et al.  Decision making under ignorance: Arguing with yourself , 1995 .

[4]  Craig R. Fox,et al.  Ambiguity Aversion and Comparative Ignorance , 1995 .

[5]  Christopher K. Hsee,et al.  Risk as Feelings , 2001, Psychological bulletin.

[6]  Zvi Safra,et al.  The Becker-DeGroot-Marschak mechanism and nonexpected utility: A testable approach , 1990 .

[7]  H. Kunreuther,et al.  Worry and the illusion of safety: Evidence from a real-objects experiment , 2002 .

[8]  Howard Kunreuther,et al.  Making Low Probabilities Useful , 2001 .

[9]  R. Hogarth,et al.  Ambiguity and Uncertainty in Probabilistic Inference. , 1985 .

[10]  J. Lindén,et al.  Eliciting Reservation Prices: Becker–Degroot–Marschak Mechanisms vs. Markets , 1997 .

[11]  Christopher K. Hsee,et al.  Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk , 2001, Psychological science.

[12]  G. McClelland,et al.  Insurance for low-probability hazards: A bimodal response to unlikely events , 1993 .

[13]  David H. Krantz,et al.  High Stakes Decision Making: Normative, Descriptive and Prescriptive Considerations , 2002 .

[14]  H. Kunreuther.  Disaster Insurance Protection: Public Policy Lessons , 1978 .

[15]  Richard J. Hillman.  TERRORISM INSURANCE: Rising Uninsured Exposure to Attacks Heightens Potential Economic Vulnerabilities , 2002 .

[16]  H Kunreuther,et al.  Determinants of Priority for Risk Reduction: The Role of Worry , 2000, Risk analysis : an official publication of the Society for Risk Analysis.

[17]  J. Neumann,et al.  Theory of games and economic behavior , 1945, 100 Years of Math Milestones.

[18]  Howard Kunreuther,et al.  The Affection Effect in Insurance Decisions , 2006 .