Dynamic Insurance Decision-Making for Rare Events: The Role of Emotions

Howard Kunreuther () and Mark V. Pauly ()
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Howard Kunreuther: University of Pennsylvania
Mark V. Pauly: University of Pennsylvania

The Geneva Papers on Risk and Insurance - Issues and Practice, 2018, vol. 43, issue 2, No 8, 335-355

Abstract: Abstract This paper describes the results of a web-based experiment that uses respondents’ stated preferences for purchasing insurance for low-probability, high-consequence events where the probability of a loss and its consequences are stable over time. We contrast the predictions of a model of insurance choice based on expected utility [E(U)] maximisation with those of an alternative behavioural model. The majority of subjects reported insurance purchasing behaviour consistent with expected utility theory; however, a sizeable number of uninsured individuals decided to purchase insurance after learning that they had suffered a loss whereby they responded that their prior choice to be uninsured made them unhappy. In this sense, the study shows that a loss coupled with self-reported emotions linked to the loss is likely to play an important role in convincing some uninsured persons to buy coverage. In contrast, insured individuals who did not suffer a loss rarely dropped coverage.

Keywords: individual decision-making; role of emotions; choice under uncertainty; insurance; disasters (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (21)

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DOI: 10.1057/s41288-017-0068-x

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