The effect of ambiguity on risk management choices: An experimental study

Vickie Bajtelsmit (), Jennifer Coats () and Paul Thistle ()

Journal of Risk and Uncertainty, 2015, vol. 50, issue 3, 249-280

Abstract: We introduce a model of the decision between precaution and insurance under an ambiguous probability of loss and employ a novel experimental design to test its predictions. Our experimental results show that the likelihood of insurance purchase increases with ambiguous increases in the probability of loss. When insurance is unavailable, individuals invest more in precaution when the probability of loss is known than when it is ambiguous. Our results suggest that sources of ambiguity surrounding liability losses may explain the documented tendency to overinsure against liability rather than meet a standard of care through precaution. The results provide support for our theoretical predictions related to risk management decisions under alternative probabilities of loss and information conditions, and have implications for liability, environmental, and catastrophe insurance markets. Copyright Springer Science+Business Media New York 2015

Keywords: Liability; Imperfect information; Design of experiments; Laboratory experiments; K130; D81; C9; C920 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11166-015-9218-3 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:50:y:2015:i:3:p:249-280

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11166/PS2

DOI: 10.1007/s11166-015-9218-3

Access Statistics for this article

Journal of Risk and Uncertainty is currently edited by W. Kip Viscusi

More articles in Journal of Risk and Uncertainty from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().