Optimism

We explore the effects that optimism bias has on the demand for insurance. Our theory is based on a simple binomial model of the demand for insurance in which consumers make optimistically biased assessments concerning the likelihood of future outcomes. From this model, we derive an insurance demand equation from which we obtain empirically testable predictions based on comparative static analysis. Our empirical study considers the demand for health insurance, and empirical results largely support our theory, in that we find that insurance demand is increasing in wealth and decreasing in optimism bias, premium loading, and the joint interaction between optimism bias and premium loading.

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