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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

Suggested Citation

  • Carmen Herrero & Josefa Tomás & Antonio Villar, 2006. "Decision theories and probabilistic insurance: an experimental test," Spanish Economic Review, Springer;Spanish Economic Association, vol. 8(1), pages 35-52, March.
    • Handle: RePEc:spr:specre:v:8:y:2006:i:1:p:35-52
    DOI: 10.1007/s10108-005-0102-1
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    References listed on IDEAS

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    1. Chiharu Ishida & Woojung Chang & Steve Taylor, 2016. "Moral intensity, moral awareness and ethical predispositions: The case of insurance fraud," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 21(1), pages 4-18, March.
    2. Johannes G. Jaspersen & Vijay Aseervatham, 2017. "The Influence of Affect on Heuristic Thinking in Insurance Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(1), pages 239-266, March.
    3. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    4. Glenn W. Harrison & Jia Min Ng, 2018. "Welfare effects of insurance contract non-performance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 39-76, May.
    5. Biener, Christian & Landmann, Andreas & Santana, Maria Isabel, 2019. "Contract nonperformance risk and uncertainty in insurance markets," Journal of Public Economics, Elsevier, vol. 175(C), pages 65-83.
    6. Timo R. Lambregts & Paul Bruggen & Han Bleichrodt, 2021. "Insurance decisions under nonperformance risk and ambiguity," Journal of Risk and Uncertainty, Springer, vol. 63(3), pages 229-253, December.
    7. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.

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