IDEAS home Printed from https://ideas.repec.org/a/taf/jriskr/v15y2012i8p937-950.html
   My bibliography  Save this article

Bounded rationality in credit consumers' payment protection insurance decisions: the effect of relative cost and level of cover

Author

Listed:
  • Rob Ranyard
  • Sandie McHugh

Abstract

A previous study found that credit consumers' decisions to purchase payment protection insurance (PPI) were surprising insensitive to changes in cost and level of cover. This was investigated further in a randomized-groups experiment in which these two factors and the cost of credit alternatives without PPI were systematically manipulated. High street bank customers ( N = 215) were presented with realistic PPI purchase scenarios and a questionnaire assessing their willingness to pay (WTP) for PPI and perceptions of its usefulness. It was found that: (1) WTP and PPI decisions were insensitive to relatively large changes in level of cover; (2) the perceived usefulness of Premium and Basic levels of cover were not significantly different, although their usefulness was a significant predictor of PPI decisions and (3) sensitivity of PPI decisions to changes in cost was dependent on the cost of credit without PPI. The first two findings are explained in terms of simplified mental representations and the evaluability of insurance cover. It is concluded that further research on the effects of the relative cost of insurance is needed.

Suggested Citation

  • Rob Ranyard & Sandie McHugh, 2012. "Bounded rationality in credit consumers' payment protection insurance decisions: the effect of relative cost and level of cover," Journal of Risk Research, Taylor & Francis Journals, vol. 15(8), pages 937-950, September.
    • Handle: RePEc:taf:jriskr:v:15:y:2012:i:8:p:937-950
    DOI: 10.1080/13669877.2012.686050
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/13669877.2012.686050
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/13669877.2012.686050?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Laurel C. Austin & Baruch Fischhoff, 2010. "Consumers' collision insurance decisions: a mental models approach to theory evaluation," Journal of Risk Research, Taylor & Francis Journals, vol. 13(7), pages 895-911, October.
    2. Sandie McHugh & Rob Ranyard, 2012. "Credit repayment decisions," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 4(2), pages 98-112, November.
    3. Royalty, Anne Beeson & Hagens, John, 2005. "The effect of premiums on the decision to participate in health insurance and other fringe benefits offered by the employer: evidence from a real-world experiment," Journal of Health Economics, Elsevier, vol. 24(1), pages 95-112, January.
    4. Hsee, Christopher K., 1996. "The Evaluability Hypothesis: An Explanation for Preference Reversals between Joint and Separate Evaluations of Alternatives," Organizational Behavior and Human Decision Processes, Elsevier, vol. 67(3), pages 247-257, September.
    5. Ranyard, Rob & McHugh, Sandie, 2012. "Defusing the risk of borrowing: The psychology of payment protection insurance decisions," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 738-748.
    6. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    7. Pryce, Gwilym, 2002. "Theory and Estimation of the Mortgage Payment Protection Insurance Decision," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 216-234, May.
    8. Stephan Meier & Charles Sprenger, 2007. "Impatience and credit behavior: evidence from a field experiment," Working Papers 07-3, Federal Reserve Bank of Boston.
    9. Williamson, Janis & Ranyard, Rob & Cuthbert, Lisa, 2000. "Risk management in everyday insurance decisions: evidence from a process tracing study," Risk, Decision and Policy, Cambridge University Press, vol. 5(1), pages 19-38, April.
    10. Gwilym Pryce, 2002. "Theory and Estimation of the Mortgage Payment Protection Insurance Decision," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 216-234, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ashton, John K. & Hudson, Robert S., 2017. "The price, quality and distribution of mortgage payment protection insurance: A hedonic pricing approach," The British Accounting Review, Elsevier, vol. 49(2), pages 242-255.
    2. Lunn, Pete & McGowan, Féidhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ranyard, Rob & McHugh, Sandie, 2012. "Defusing the risk of borrowing: The psychology of payment protection insurance decisions," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 738-748.
    2. Charles Changchuan Jiang & Liana Fraenkel, 2017. "The Influence of Varying Cost Formats on Preferences," Medical Decision Making, , vol. 37(1), pages 17-26, January.
    3. Thomas Kourouxous & Thomas Bauer, 2019. "Violations of dominance in decision-making," Business Research, Springer;German Academic Association for Business Research, vol. 12(1), pages 209-239, April.
    4. Diaz-Serrano, Luis, 2005. "Income volatility and residential mortgage delinquency across the EU," Journal of Housing Economics, Elsevier, vol. 14(3), pages 153-177, September.
    5. Diaz-Serrano, Luis, 2004. "Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU Countries," IZA Discussion Papers 1396, Institute of Labor Economics (IZA).
    6. Ashton, John K. & Hudson, Robert S., 2017. "The price, quality and distribution of mortgage payment protection insurance: A hedonic pricing approach," The British Accounting Review, Elsevier, vol. 49(2), pages 242-255.
    7. José Luis Pinto‐Prades & José Antonio Robles‐Zurita & Fernando‐Ignacio Sánchez‐Martínez & José María Abellán‐Perpiñán & Jorge Martínez‐Pérez, 2017. "Improving scope sensitivity in contingent valuation: Joint and separate evaluation of health states," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 304-318, December.
    8. Lunn, Pete & McGowan, Féidhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78, June.
    9. Johannes G. Jaspersen, 2016. "Hypothetical Surveys And Experimental Studies Of Insurance Demand: A Review," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 217-255, January.
    10. Philippe P. F. M. van de Calseyde & Gideon Keren & Marcel Zeelenberg, 2013. "The insured victim effect: When and why compensating harm decreases punishment recommendations," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(2), pages 161-173, March.
    11. Marieke Huysentruyt & Daniel Read, 2010. "How do people value extended warranties? Evidence from two field surveys," Journal of Risk and Uncertainty, Springer, vol. 40(3), pages 197-218, June.
    12. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    13. Marieke Huysentruyt & Daniel Read, 2008. "How do people value extended warranties?: Evidence from two field surveys," Working Papers 2008_02, Durham University Business School.
    14. Popkowski Leszczyc, Peter T.L. & Pracejus, John W. & Shen, Yingtao, 2008. "Why more can be less: An inference-based explanation for hyper-subadditivity in bundle valuation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(2), pages 233-246, March.
    15. repec:cup:judgdm:v:8:y:2013:i:2:p:161-173 is not listed on IDEAS
    16. Wiebke Roß & Jens Weghake, 2018. "Wa(h)re Liebe: Was Online-Dating-Plattformen über zweiseitige Märkte lehren," TUC Working Papers in Economics 0017, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).
    17. Lucius Caviola & Nadira Faulmüller & Jim. A. C. Everett & Julian Savulescu & Guy Kahane, 2014. "The evaluability bias in charitable giving: Saving administration costs or saving lives?," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 9(4), pages 303-315, July.
    18. Alexandra Rausch & Alexander Brauneis, 2015. "It’s about how the task is set: the inclusion–exclusion effect and accountability in preprocessing management information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 313-344, June.
    19. Moore, Don A., 1999. "Order Effects in Preference Judgments: Evidence for Context Dependence in the Generation of Preferences, ," Organizational Behavior and Human Decision Processes, Elsevier, vol. 78(2), pages 146-165, May.
    20. Sarah Jacobson & Ragan Petrie, 2009. "Learning from mistakes: What do inconsistent choices over risk tell us?," Journal of Risk and Uncertainty, Springer, vol. 38(2), pages 143-158, April.
    21. Stefania Pighin & Lucia Savadori & Elisa Barilli & Rino Rumiati & Sara Bonalumi & Maurizio Ferrari & Laura Cremonesi, 2013. "Using Comparison Scenarios to Improve Prenatal Risk Communication," Medical Decision Making, , vol. 33(1), pages 48-58, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:jriskr:v:15:y:2012:i:8:p:937-950. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RJRR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.