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Health insurance choice and risk preferences under cumulative prospect theory – an experiment

Kairies-Schwarz, Nadja, Johanna Kokot, Markus Vomhof and Jens Weßling

Journal of Economic Behavior & Organization, 2017, vol. 137, issue C, 374-397

Abstract: We investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences. For this, we use a laboratory experiment with a sequential design. First, subjects face insurance choices. Then, we elicit risk preferences. Allowing for different latent decision making theories, i.e. Cumulative Prospect Theory and Expected Utility Theory, we find that the vast majority are Cumulative Prospect Theory types. Analyzing whether subjects choose contracts consistent with their risk preferences, we find that about 14% of all participants show inconsistent behavior and low decision quality. Yet, the majority shows consistent behavior and good decision quality. Our results suggest that one explanation for inconsistent choices is the application of heuristics.

Keywords: Health insurance; Risk preferences; Heterogeneity; Laboratory experiment; Cumulative Prospect Theory (search for similar items in EconPapers)
JEL-codes: C91 I13 D81 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jeborg:v:137:y:2017:i:c:p:374-397