 Behavioral Economics of Multiperiod Insurance Purchasing Behavior: The Role of EmotionsHoward Kunreuther and Mark Pauly Foundations and Trends(R) in Microeconomics, 2018, vol. 12, issue 2, 109–199 Abstract: Consumers face many risky situations that can severely impact their wealth or health from one year to the next. People sometimes behave in inconsistent ways in such settings; many individuals faced with these risks do not consider purchasing insurance until after suffering a loss, but then they may cancel their policy a few years later if they have not had a claim (Kunreuther, Pauly, and McMorrow 2013). Our interest is in why a consumer, having decided whether or not to purchase insurance for a particular year, might change that decision over time – even if the person’s risk and insurance premium remain exactly the same every year in the future. In some circumstances (fire insurance, life insurance), many people renew their policies year after year in ways consistent with relevant tradeoffs that consider the likelihood and consequences of a particular risk in relation to the cost of the insurance. If these individuals make decisions systematically, they should not change their insurance decision over time if the probability, the premiums, and the consequences from the risk remain the same from year to year. However, we find that a significant number of people are swayed by their emotions and past experiences when making their future insurance decisions. This behavior is particularly common for risks that are classified as low-probability, high-consequence (LP-HC) events. Because consumers’ knowledge is incomplete, ambiguous, and biased by recent experience, they may rely on their intuition to decide whether to buy, keep, drop, or change the extent of their insurance coverage. Potential buyers may not face an identical set of circumstances year after year. Loss probabilities may change over time (for example, due to global warming, build-up of earthquake stresses, or onset of a chronic health condition). Buyers may be confused about whether experiencing a major loss tells them something about future probabilities, even if they are explicitly informed as to the potential damage from a future low probability event. Having suffered a personal loss may affect how the person feels about next year’s coverage. The interplay between changing expectations about next period’s risk and willingness to buy insurance can, in theory and in practice, affect buyer behavior in many different ways. Keywords: Insurance; Health Economics; Behavioral economics; Biases; Heuristics; Individual Decision Making (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:now:fntmic:0700000069 Access Statistics for this article More articles in Foundations and Trends(R) in Microeconomics from now publishers |
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