Is Imprecise Knowledge Better than Conflicting Expertise? Evidence from Insurers’ Decisions in the United States
AbstractTesting whether risk professionals (here insurers) behave differently under risk and ambiguity when they cover catastrophic risks (floods and earthquakes) and non-catastrophic risks (fires), this paper reports the results of the first field experiment in the United States designed to distinguish two sources of ambiguity: imprecise ambiguity (outside experts agree on a range of probability, but not on any point estimate) versus conflict ambiguity (each expert group provides precise probability estimates which differ from one group to another). Insurers charge higher premiums when faced with ambiguity than when the probability of a loss is well specified. Furthermore they charge more for conflict ambiguity than imprecise ambiguity for flood and hurricane hazards, but less so in the case of fire. The source of ambiguity also impacts causal inferences insurers make to reduce their uncertainty.
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Bibliographic InfoPaper provided by International Centre for Behavioural Business Research in its series ICBBR Working Papers with number 7.
Date of creation: 23 Feb 2010
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Ambiguity; Source of Uncertainty; Insurance Pricing; Decision-Making;
Find related papers by JEL classification:
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-06 (All new papers)
- NEP-CBE-2010-03-06 (Cognitive & Behavioural Economics)
- NEP-IAS-2010-03-06 (Insurance Economics)
- NEP-KNM-2010-03-06 (Knowledge Management & Knowledge Economy)
- NEP-UPT-2010-03-06 (Utility Models & Prospect Theory)
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