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The Nature of Risk Preferences: Evidence from Insurance Choices

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  • Levon Barseghyan
  • Francesca Molinari
  • Ted O'Donoghue
  • Joshua C. Teitelbaum

Abstract

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions - characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes - play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kõszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3933.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3933

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  1. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
  2. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(4), pages 767-820, 06.
  3. Loomes, G. & Moffatt, P.G. & Sugden, R., 1998. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," University of East Anglia Discussion Papers in Economics, School of Economics, University of East Anglia, Norwich, UK. 9806, School of Economics, University of East Anglia, Norwich, UK..
  4. Bruno Jullien & Bernard Salanié, 1997. "Estimating Preferences under Risk : The Case of Racetrack Bettors," Working Papers, Centre de Recherche en Economie et Statistique 97-39, Centre de Recherche en Economie et Statistique.
  5. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, Econometric Society, vol. 57(3), pages 571-87, May.
  6. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 118(4), pages 723-746, 08.
  7. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2007. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0705, Socioeconomic Institute - University of Zurich, revised Jul 2007.
  8. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
  9. Kliger, Doron & Levy, Ori, 2009. "Theories of choice under risk: Insights from financial markets," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 71(2), pages 330-346, August.
  10. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 38-71, March.
  11. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, Econometric Society, vol. 62(6), pages 1291-1326, November.
  12. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 77(1), pages 39-84.
  13. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 97(5), pages 1921-1938, December.
  14. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, Econometric Society, vol. 62(6), pages 1251-89, November.
  15. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, American Economic Association, vol. 100(1), pages 557-71, March.
  16. Levon Barseghyan & Jeffrey Prince & Joshua C. Teitelbaum, 2011. "Are Risk Preferences Stable across Contexts? Evidence from Insurance Data," American Economic Review, American Economic Association, American Economic Association, vol. 101(2), pages 591-631, April.
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