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Use of Insurance Against a Small Loss as an Incentive Strategy

Daniella Meeker (), Christin Thompson (), Greg Strylewicz (), Tara K. Knight () and Jason Doctor
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Daniella Meeker: University of Southern California, Los Angeles, California 90033; and RAND Corporation, Santa Monica, California 90401
Christin Thompson: University of Southern California, Los Angeles, California 90033
Greg Strylewicz: University of Washington, Seattle, Washington 98195
Tara K. Knight: University of Southern California, Los Angeles, California 90033

Decision Analysis, 2015, vol. 12, issue 3, 122-129

Abstract: The success of extended warranties and buyer protection plans suggests that insurance against a small loss has high decision utility. We explore whether the behavioral insight that people are highly averse to small chances of loss can be used to create a powerful incentive that has very low expected value. We compare decisions of individuals offered fixed payments for healthy choices to those offered insurance in exchange for healthy choices. We test the prediction that aversion to small losses will result in very high rates of health behavior uptake in exchange for insurance. Three hundred participants endowed with a $2 bonus randomly received one of two incentives for completing a scheduled health risk assessment: (1) an insurance guarantee against the 1% risk of losing the $2 bonus or (2) a fixed payment at the expected value of the insurance. Relative to the fixed payment condition, participants in the insurance intervention were 70% more likely to meet their health risk assessment appointment ( p

Keywords: decision analysis; nonexpected utility; decision psychology; behavioral economics; incentives; insurance (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:inm:ordeca:v:12:y:2015:i:3:p:122-129