Comparing the effects of behaviorally informed interventions on flood insurance demand: an experimental analysis of ‘boosts’ and ‘nudges’

This paper compares the effects of two types of behaviorally informed policy – nudges and boosts – that are designed to increase consumer demand for insurance against low-probability, high-consequence events. Using previous findings in the behavioral sciences literature, this paper constructs and implements two nudges (an ‘informational’ and an ‘affective’ nudge) and a statistical numeracy boost and then elicits individual risk beliefs and demand for flood insurance using a contingent valuation survey of 331 participants recruited from an online labor pool. Using a two-limit Tobit model to estimate willingness to pay (WTP) for flood insurance, this paper finds that the affective and informational nudges result in increases in WTP for flood insurance of roughly $21/month and $11/month relative to the boost, respectively. Taken together, the findings of this paper suggest that nudges are the more effective behaviorally informed policy in this setting, particularly when the nudge design targets the affect and availability heuristics; however, additional research is necessary to establish sufficient conditions for this conclusion.

[1]  Jeffrey M. Woodbridge.  Econometric Analysis of Cross Section and Panel Data , 2002 .

[2]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[3]  Gerd Gigerenzer,et al.  Homo Heuristicus: Why Biased Minds Make Better Inferences , 2009, Top. Cogn. Sci..

[4]  F. Knight.  The economic nature of the firm: From Risk, Uncertainty, and Profit , 2009 .

[5]  Sabrina M. Tom,et al.  The Neural Basis of Loss Aversion in Decision-Making Under Risk , 2007, Science.

[6]  A. Tversky,et al.  Rational choice and the framing of decisions , 1990 .

[7]  Melissa L. Finucane,et al.  Rational actors or rational fools: implications of the affect heuristic for behavioral economics , 2002 .

[8]  Fabio Wasserfallen,et al.  Learning and the diffusion of regime contention in the Arab Spring , 2015 .

[9]  R. Nisbett,et al.  Immediate and delayed transfer of training effects in statistical reasoning. , 1991, Journal of experimental psychology. General.

[10]  Joseph E. Stiglitz,et al.  Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information , 1976 .

[11]  Gerd Gigerenzer,et al.  How to Improve Bayesian Reasoning Without Instruction: Frequency Formats , 1995 .

[12]  Probability Neglect: Emotions, Worst Cases, and Law , 2002 .

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

[14]  Eric J. Johnson,et al.  Framing, probability distortions, and insurance decisions , 1993 .

[15]  R. Thaler,et al.  Nudge: Improving Decisions About Health, Wealth, and Happiness , 2008 .

[16]  Adam J. Berinsky,et al.  Evaluating Online Labor Markets for Experimental Research: Amazon.com's Mechanical Turk , 2012, Political Analysis.

[17]  D. R. Lehman,et al.  Teaching reasoning. , 1987, Science.

[18]  R. Hertwig,et al.  Decisions from Experience and the Effect of Rare Events in Risky Choice , 2004, Psychological science.

[19]  Daniel Kahneman,et al.  Availability: A heuristic for judging frequency and probability , 1973 .

[20]  Baruch Fischhoff,et al.  Accident probabilities and seat belt usage: A psychological perspective☆ , 1978 .

[21]  C. Kousky.  Financing Flood Losses: A Discussion of the National Flood Insurance Program , 2018 .

[22]  Cass R. Sunstein,et al.  Nudges, Agency, and Abstraction: A Reply to Critics , 2015 .

[23]  Teun Terpstra,et al.  Improving Flood Risk Communication by Focusing on Prevention‐Focused Motivation , 2014, Risk analysis : an official publication of the Society for Risk Analysis.

[24]  D Kahneman,et al.  On the reality of cognitive illusions. , 1996, Psychological review.

[25]  I. Logar,et al.  The effect of risk communication on choice behavior, welfare estimates and choice certainty ☆ , 2017 .

[26]  D. Krantz,et al.  The effects of statistical training on thinking about everyday problems , 1986, Cognitive Psychology.

[27]  Markus A. Feufel,et al.  TOWARD A FRAMEWORK FOR SELECTING BEHAVIOURAL POLICIES: HOW TO CHOOSE BETWEEN BOOSTS AND NUDGES , 2018, Economics and Philosophy.

[28]  Gerd Gigerenzer,et al.  Why do frequency formats improve Bayesian reasoning? Cognitive algorithms work on information, which needs representation , 1996, Behavioral and Brain Sciences.

[29]  H. Kunreuther.  Improving the National Flood Insurance Program , 2018, Behavioural Public Policy.

[30]  E. Higgins.  Promotion and Prevention: Regulatory Focus as A Motivational Principle , 1998 .

[31]  J. Boer,et al.  More Than Fear Induction: Toward an Understanding of People's Motivation to Be Well‐Prepared for Emergencies in Flood‐Prone Areas , 2015, Risk analysis : an official publication of the Society for Risk Analysis.

[32]  E. Michel‐Kerjan,et al.  What drives households to buy flood insurance? New evidence from Georgia , 2015 .

[33]  Gerd Gigerenzer,et al.  Teaching Bayesian reasoning in less than two hours. , 2001, Journal of experimental psychology. General.

[34]  Howard Kunreuther,et al.  Economics, psychology and protective behavior , 1978 .

[35]  B. Fischhoff,et al.  Judged frequency of lethal events , 1978 .

[36]  A. Tversky,et al.  The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test , 1997 .

[37]  J. C. van den Bergh,et al.  Risk attitudes to low-probability climate change risks: WTP for flood insurance , 2012 .

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

[39]  W. Viscusi.  Are Individuals Bayesian Decision Makers , 1985 .

[40]  Philip D. Waggoner,et al.  Are samples drawn from Mechanical Turk valid for research on political ideology? , 2015 .

[41]  H. Kunreuther,et al.  Protecting against Low Probability Disasters: the Role of Worry Citation and Reproduction the Wharton Risk Management and Decision Processes Center Protecting against Low Probability Disasters: the Role of Worry , 2022 .

[42]  M. Siegrist,et al.  The Role of the Affect and Availability Heuristics in Risk Communication , 2006, Risk analysis : an official publication of the Society for Risk Analysis.

[43]  Gerd Gigerenzer,et al.  Breast cancer screening pamphlets mislead women , 2014, BMJ : British Medical Journal.

[44]  J. Tukey.  Comparing individual means in the analysis of variance. , 1949, Biometrics.

[45]  Stephen M. Johnson,et al.  The affect heuristic in judgments of risks and benefits , 2000 .

[46]  Ralph Hertwig,et al.  Nudge Versus Boost: How Coherent are Policy and Theory? , 2016, Minds and Machines.

[47]  Dan R. Schley,et al.  Protective Measures, Personal Experience, and the Affective Psychology of Time , 2012, Risk analysis : an official publication of the Society for Risk Analysis.

[48]  A. Oliver.  Behavioural Public Policy , 2013 .

[49]  Gerd Gigerenzer,et al.  Fast and frugal heuristics: The adaptive toolbox. , 1999 .

[50]  Carey K. Morewedge,et al.  Debiasing Decisions , 2015 .

[51]  Christopher K. Hsee,et al.  The Evaluability Hypothesis: An Explanation for Preference Reversals between Joint and Separate Evaluations of Alternatives , 1996 .

[52]  T. Amemiya.  Tobit models: A survey , 1984 .

[53]  W. Botzen,et al.  Framing of risk and preferences for annual and multi-year flood insurance , 2013 .

[54]  Raj Chetty.  Behavioral Economics and Public Policy: A Pragmatic Perspective , 2015 .

[55]  J. Tobin.  Estimation of Relationships for Limited Dependent Variables , 1958 .

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

[57]  D. Benjamin,et al.  Errors in Probabilistic Reasoning and Judgment Biases , 2018 .

[58]  J. Potters,et al.  An experiment on risk taking and evaluation periods , 1997 .

[59]  P. Slovic.  Perception of risk. , 1987, Science.

[60]  A. Tversky,et al.  The Disjunction Effect in Choice under Uncertainty , 1992 .

[61]  W. Kip Viscusi,et al.  Adaptive Responses to Chemical Labeling: Are Workers Bayesian Decision Makers? , 1984 .

[62]  M. Browne,et al.  Behavioral bias and the demand for bicycle and flood insurance , 2015 .

[63]  B. Fischhoff,et al.  Preference for Insuring against Probable Small Losses: Insurance Implications , 1977 .

[64]  Mark Pauly,et al.  Behavioral Economics of Multiperiod Insurance Purchasing Behavior: The Role of Emotions , 2018, Found. Trends Microeconomics.

[65]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[66]  E. Shafir.  The Behavioral Foundations of Public Policy , 2013 .