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Mutual Sharing or Insurance? An Experimental Study of Decisions at Various Levels of Uncertainty

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Author Info

  • Ahmed, Ali M.

    ()
    (Centre for Labour Market Policy Research (CAFO))

  • Skogh, Göran

    ()
    (University of Linköping)

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    Abstract

    Decision theory assumes that agents making choices assign subjective probabilities to outcomes, also at choices where information on probabilities is obviously absent. Yet, Skogh and Wu (2005) show that risk averse agents may gain by risk sharing also at unknown (and unassigned) probabilities of losses, as long as the agents presume that the risks are equal. Their Restated diversification theorem is tested by an experiment where the players may lose half their endowments in each of five risky rounds. The probability of loss, and the information about this probability, varies with the rounds. The result supports the hypothesis of beneficial risk sharing at genuine uncertainty. Moreover, the result tentatively supports an evolutionary theory of the development of the insurance industry starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available.

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    Bibliographic Info

    Paper provided by Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University in its series CAFO Working Papers with number 2006:12.

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    Length: 25 pages
    Date of creation: 12 Nov 2006
    Date of revision:
    Handle: RePEc:hhs:vxcafo:2006_012

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    Postal: Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University, SE 351 95 Växjö, Sweden
    Phone: +46 470 70 87 64
    Web page: http://lnu.se/research-groups/cafo?l=en
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    Related research

    Keywords: Loss sharing; Insurance; Risk; Ambiguity; Uncertainty Experiment.;

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