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Decision theories and probabilistic insurance: an experimental test

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  • Carmen Herrero
  • Josefa Tomás

    ()

  • Antonio Villar

Abstract

This paper reports the results of an experiment in which probabilistic insurance, as proposed by Kahneman and Tversky (1979), is compared both with full insurance and no insurance. The experimental results conform to the intuitive prediction that risk-averse agents who are indifferent between full insurance and no insurance, will prefer full insurance to probabilistic insurance and probabilistic insurance to no insurance. The first conclusion is incompatible with the predictions of expected utility theory, and the second with Kahneman and Tversky's prospect theory. We also show that Loomes and Sudgen's regret theory can easily accommodate these intuitive results. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s10108-005-0102-1
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Bibliographic Info

Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 8 (2006)
Issue (Month): 1 (03)
Pages: 35-52

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Handle: RePEc:spr:specre:v:8:y:2006:i:1:p:35-52

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Related research

Keywords: Probabilistic insurance; prospect theory; regret theory;

References

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  1. Cummings, Ronald G, et al, 1997. "Are Hypothetical Referenda Incentive Compatible?," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 609-21, June.
  2. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
  3. Wakker, P.P. & Thaler, R.H. & Tversky, A., 1997. "Probabilistic insurance," Discussion Paper 1997-35, Tilburg University, Center for Economic Research.
  4. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  5. Battalio, Raymond C & Kagel, John H & Jiranyakul, Komain, 1990. " Testing between Alternative Models of Choice under Uncertainty: Some Initial Results," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 25-50, March.
  6. Starmer, Chris & Sugden, Robert, 1991. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation," American Economic Review, American Economic Association, vol. 81(4), pages 971-78, September.
  7. Loomes, Graham, 1988. "Further Evidence of the Impact of Regret and Disappointment in Choice under Uncertainty," Economica, London School of Economics and Political Science, vol. 55(217), pages 47-62, February.
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