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Choices at various levels of uncertainty: An experimental test of the restated diversification theorem

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Author Info
Ali Ahmed ()
Göran Skogh ()
Abstract

Our “Restated diversification theorem” (Skogh and Wu, 2005) says that risk-averse agents may pool risks efficiently without assignment of subjective probabilities to outcomes, also at genuine uncertainty. It suffices that the agents presume that they face equal risks. Here, the theorem is tested in an experiment where the probability of loss, and the information about this probability, varies. The result supports our theorem. Moreover, it tentatively supports an evolutionary theory of the insurance industry—starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available. Copyright Springer Science + Business Media, LLC 2006

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Publisher Info
Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 33 (2006)
Issue (Month): 3 (December)
Pages: 183-196
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Handle: RePEc:kap:jrisku:v:33:y:2006:i:3:p:183-196

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Related research
Keywords: Loss sharing; Insurance; Risk; Ambiguity; Uncertainty; Experiment;

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References listed on IDEAS
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  1. Sinn, Hans-Werner, 1980. "A Rehabilitation of the Principle of Insufficient Reason," The Quarterly Journal of Economics, MIT Press, vol. 94(3), pages 493-506, May.
  2. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  3. Sarin, Rakesh K & Winkler, Robert L, 1992. " Ambiguity and Decision Modeling: A Preference-Based Approach," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 389-407, October.
  4. Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
  5. Bernasconi, Michele, 1992. " Different Frames for the Independence Axiom: An Experimental Investigation in Individual Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 5(2), pages 159-74, May.
  6. Camerer, Colin & Kunreuther, Howard, 1989. " Experimental Markets for Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 265-99, September.
  7. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March. [Downloadable!] (restricted)
  8. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ali Ahmed, 2007. "Decisions under unpredictable losses: An examination of the restated diversification principle," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 2, pages 312-316, October. [Downloadable!]
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