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Ambiguity Aversion in the Field of Insurance: Insurers’ Attitude to Imprecise and Conflicting Probability Estimates

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  • Laure Cabantous

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    Abstract

    This article presents the results of a survey designed to test, with economically sophisticated participants, Ellsberg’s ambiguity aversion hypothesis, and Smithson’s conflict aversion hypothesis. Based on an original sample of 78 professional actuaries (all members of the French Institute of Actuaries), this article provides empirical evidence that ambiguity (i.e. uncertainty about the probability) affect insurers’ decision on pricing insurance. It first reveals that premiums are significantly higher for risks when there is ambiguity regarding the probability of the loss. Second, it shows that insurers are sensitive to sources of ambiguity. The participants indeed, charged a higher premium when ambiguity came from conflict and disagreement regarding the probability of the loss than when ambiguity came from imprecision (imprecise forecast about the probability of the loss). This research thus documents the presence of both ambiguity aversion and conflict aversion in the field of insurance, and discuses economic and psychological rationales for the observed behaviours. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11238-006-9015-1
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    Bibliographic Info

    Article provided by Springer in its journal Theory and Decision.

    Volume (Year): 62 (2007)
    Issue (Month): 3 (May)
    Pages: 219-240

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    Handle: RePEc:kap:theord:v:62:y:2007:i:3:p:219-240

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    Web page: http://www.springerlink.com/link.asp?id=100341

    Related research

    Keywords: ambiguity aversion; conflict aversion; Ellsberg paradox; insurance;

    References

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    1. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 585-603, August.
    2. Ho, Joanna L Y & Keller, L Robin & Keltyka, Pamela, 2002. " Effects of Outcome and Probabilistic Ambiguity on Managerial Choices," Journal of Risk and Uncertainty, Springer, vol. 24(1), pages 47-74, January.
    3. Curley, Shawn P. & Yates, J. Frank, 1985. "The center and range of the probability interval as factors affecting ambiguity preferences," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 36(2), pages 273-287, October.
    4. Anna Maffioletti & Michele Santoni, 2001. "Do trade union leaders violate subjective expected utility? Some insight from experimental data," Departmental Working Papers, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano 2001-15, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    5. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
    6. Budescu, David V. & Kuhn, Kristine M. & Kramer, Karen M. & Johnson, Timothy R., 2002. "Modeling certainty equivalents for imprecise gambles," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 88(2), pages 748-768, July.
    7. Sherman, Roger, 1974. "The Psychological Difference Between Ambiguity and Risk," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(1), pages 166-69, February.
    8. Cohen, Michele & Jaffray, Jean-Yves & Said, Tanios, 1987. "Experimental comparison of individual behavior under risk and under uncertainty for gains and for losses," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 39(1), pages 1-22, February.
    9. W. Viscusi & Harrell Chesson, 1999. "Hopes and Fears: the Conflicting Effects of Risk Ambiguity," Theory and Decision, Springer, Springer, vol. 47(2), pages 157-184, October.
    10. Hogarth, Robin M & Kunreuther, Howard, 1989. " Risk, Ambiguity, and Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 5-35, April.
    11. Heath, Chip & Tversky, Amos, 1991. " Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
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    Cited by:
    1. Feduzi, Alberto & Runde, Jochen, 2011. "The uncertain foundations of the welfare state," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 613-627.
    2. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    3. Alpaslan Akay & Peter Martinsson & Haileselassie Medhin & Stefan Trautmann, 2012. "Attitudes toward uncertainty among the poor: an experiment in rural Ethiopia," Theory and Decision, Springer, Springer, vol. 73(3), pages 453-464, September.
    4. Keck, Steffen & Diecidue, Enrico & Budescu, David V., 2014. "Group decisions under ambiguity: Convergence to neutrality," Journal of Economic Behavior & Organization, Elsevier, vol. 103(C), pages 60-71.
    5. Thibault Gajdos & Jean-Christophe Vergnaud, 2013. "Decisions with conflicting and imprecise information," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00443075, HAL.
    6. Christian Gollier, 2008. "Liquidité, incertitude et crise," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 7(1), pages 129-133.
    7. Heinrich, Tobias, 2013. "Endogenous negative stereotypes: A similarity-based approach," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 45-54.
    8. Véronique Le Bihan & Sophie Pardo, 2010. "Les limites de la couverture des risques en aquaculture : le cas des conchyliculteurs en France," Working Papers hal-00527115, HAL.
    9. Anne Stenger & Stéphane Couture & Laure Cabantous & Marielle Brunette, 2009. "Assurance, intervention publique et ambiguïté : une étude expérimentale auprès de propriétaires forestiers privés," Économie et Prévision, Programme National Persée, vol. 190(4), pages 123-134.
    10. Fairley, Kim & Sanfey, Alan & Vyrastekova, Jana & Weitzel, Utz, 2012. "Social risk and ambiguity in the trust game," MPRA Paper 42302, University Library of Munich, Germany.
    11. Théodora Dupont-Courtade, 2012. "Insurance demand under ambiguity and conflict for extreme risks : Evidence from a large representative survey," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00718642, HAL.
    12. Huang, Rachel J. & Huang, Yi-Chieh & Tzeng, Larry Y., 2013. "Insurance bargaining under ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 812-820.

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