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The Impact of Insurance Prices on Decision Making Biases: An Experimental Analysis

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  • Susan K. Laury
  • Melayne Morgan McInnes

Abstract

This article tests whether the use of endogenous risk categorization by insurers enables consumers to make better-informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so. However, fewer subjects purchase insurance when the probability of a loss is higher. Copyright 2003 The Journal of Risk and Insurance.

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Bibliographic Info

Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

Volume (Year): 70 (2003)
Issue (Month): 2 ()
Pages: 219-233

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Handle: RePEc:bla:jrinsu:v:70:y:2003:i:2:p:219-233

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Cited by:
  1. Céline Grislain-Letrémy & Sabine Lemoyne de Forges, 2011. "Coordinating Flood Insurance and Collective Prevention Policies: A Fiscal Federalism Perspective," Working Papers 2011-07, Centre de Recherche en Economie et Statistique.
  2. Jean Desrochers & J. Francois Outreville, 2013. "Uncertainty, Ambiguity and Risk Taking: an experimental investigation of consumer behavior and demand for insurance," ICER Working Papers 10-2013, ICER - International Centre for Economic Research.

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