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The Nature of Risk Preferences: Evidence from Insurance Choices

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Author Info

  • Levon Barseghyan
  • Francesca Molinari
  • Ted O'Donoghue
  • Joshua C. Teitelbaum

Abstract

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions?characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes?play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither K?szegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 6 (October)
Pages: 2499-2529

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:6:p:2499-2529

Note: DOI: 10.1257/aer.103.6.2499
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References

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  1. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
  2. Loomes, Graham & Moffatt, Peter G & Sugden, Robert, 2002. " A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 103-30, March.
  3. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," NBER Working Papers 15923, National Bureau of Economic Research, Inc.
  4. Bruno Jullien & Bernard Salanié, 1997. "Estimating Preferences under Risk : The Case of Racetrack Bettors," Working Papers 97-39, Centre de Recherche en Economie et Statistique.
  5. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
  6. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
  7. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2010. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," Econometrica, Econometric Society, vol. 78(4), pages 1375-1412, 07.
  8. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  9. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, 06.
  10. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
  11. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, vol. 101(2), pages 591-631, April.
  12. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
  13. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  14. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-71, March.
  15. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  16. Kliger, Doron & Levy, Ori, 2009. "Theories of choice under risk: Insights from financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 330-346, August.
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