An Experimental Study of the Full-Coverage Puzzle

Itzhak Venezia and Zur Shapira

Yale School of Management Working Papers from Yale School of Management

Abstract: One of the most intriguing questions in insurance is the preference of consumers to buy low or no deductible insurance policies. This stands in sharp contrast to the theorem, proved by Mossin, 1968, that when the price of insurance is higher than its actuarial value, then under quite reasonable assumptions full coverage is not optimal. We show in a set of experiments that amateur subjects tend to underestimate the value of a policy with a deductible and that the degree of underestimation depends on the level

Date: 2003-02-01, Revised 2003-04-01
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