Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events

Gary H. McClelland, William D. Schulze and Don L. Coursey
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Gary H. McClelland: University of Colorado, Department of Psychology
William D. Schulze: University of Colorado, Department of Economics
Don L. Coursey: University of Chicago, Harris School of Public Policy Studies

A chapter in Making Decisions About Liability And Insurance, 1993, pp 95-116 from Springer

Abstract: Abstract Two insurance experiments using real-money consequences and multiple rounds to provide experience are described. In the first experiment, subjects bid for insurance to prevent a fixed loss of $4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of .01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to $40. A similar bimodal distribution was obtained that persisted over 50 rounds of experience. These laboratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to worry too much about them.

Keywords: low-probability hazards; bimodality; unlikely events; insurance (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-94-011-2192-7_7

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DOI: 10.1007/978-94-011-2192-7_7

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