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Black Swan Protection: an Experimental Investigation

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  • Ozlem Ozdemir

    ()
    (Middle East Technical University, Department of Business Administration, Ankara, Turkey)

  • Andrea Morone

    ()
    (Università degli Studi di Bari, Aldo Moro Dipartimento di Studi Aziendali e Giusprivatistici, Bari, Italy and LEE-Economics Department, Universitat Jaume I, Castellón, Spain)

Abstract

This experimental study investigates insurance decisions in low-probability, high-loss risk situations. Results indicate that subjects consider the probability of loss (loss size) when they make buying decisions (paying decisions). Most individuals are risk averse with no specific threshold probability.

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File URL: http://www.doctreballeco.uji.es/wpficheros/ozdemir_morone_2012.pdf
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Bibliographic Info

Paper provided by Economics Department, Universitat Jaume I, Castellón (Spain) in its series Working Papers with number 2012/12.

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Length: 25 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:jau:wpaper:2012/12

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Keywords: Black swan; Risk; Insurance; Low probability; High loss; Experiment;

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  1. John Hey & Andrea Morone & Ulrich Schmidt, 2009. "Noise and bias in eliciting preferences," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235, December.
  2. Grether, David M. & Plott, Charles R., . "Economic Theory of Choice and the Preference Reversal Phenomenon," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 152, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Meroz, Yael & Morone, Andrea & Morone, Piergiuseppe, 2009. "Eliciting environmental preferences of Ghanaians in the laboratory: An incentive-compatible experiment," MPRA Paper 17107, University Library of Munich, Germany.
  4. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, vol. 80(3), pages 353-74, June.
  5. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
  6. Pommerehne, Werner W & Schneider, Friedrich & Zweifel, Peter, 1982. "Economic Theory of Choice and the Preference Reversal Phenomenon: A Reexamination," American Economic Review, American Economic Association, vol. 72(3), pages 569-74, June.
  7. Seidl, Christian & Traub, Stefan & Morone, Andrea, 2005. "Relative Deprivation, Personal Income Satisfaction, and Average Well-being under Different Income Distributions," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2005/04, World Institute for Development Economic Research (UNU-WIDER).
  8. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2004. "Herding with and without Payoff Externalities - An Internet Experiment," Bonn Econ Discussion Papers, University of Bonn, Germany bgse15_2004, University of Bonn, Germany.
  9. Andrea Morone, 2004. "Comparison of Mean-Variance theory and Expected-Utility theory through a Laboratory Experiment," Experimental, EconWPA 0402001, EconWPA.
  10. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  11. Andrea Morone & Ozlem Ozdemir, 2012. "Displaying Uncertain Information About Probability: Experimental Evidence," Bulletin of Economic Research, Wiley Blackwell, vol. 64(2), pages 157-171, 04.
  12. Philip Ganderton & David Brookshire & Michael McKee & Steve Stewart & Hale Thurston, 2000. "Buying Insurance for Disaster-Type Risks: Experimental Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 271-289, May.
  13. Andrea Morone & Ulrich Schmidt, 2008. "An Experimental Investigation of Alternatives to Expected Utility Using Pricing Data," Economics Bulletin, AccessEcon, vol. 4(20), pages 1-12.
  14. Starmer, Chris & Sugden, Robert, 1991. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation," American Economic Review, American Economic Association, vol. 81(4), pages 971-78, September.
  15. Morone, Andrea, 2009. "On Price Data Elicitation: a Laboratory Investigation," MPRA Paper 18358, University Library of Munich, Germany.
  16. Alfred Mueller, 1996. "Comparing Risks with Unbounded Distributions," Working Papers, Risk and Insurance Archive 026, Risk and Insurance Archive.
  17. Camacho-Cuena, Eva & Seidl, Christian & Morone, Andrea, 2005. "Comparing preference reversal for general lotteries and income distributions," Journal of Economic Psychology, Elsevier, vol. 26(5), pages 682-710, October.
  18. Machina, Mark J & Pratt, John W, 1997. "Increasing Risk: Some Direct Constructions," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 103-27, March.
  19. Holt, Charles A, 1986. "Preference Reversals and the Independence Axiom," American Economic Review, American Economic Association, vol. 76(3), pages 508-15, June.
  20. William T. Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Prospect Theory in Choice and Pricing Tasks," University of Oregon Economics Department Working Papers, University of Oregon Economics Department 2002-02, University of Oregon Economics Department, revised 20 Aug 2007.
  21. Segal, Uzi, 1988. "Does the Preference Reversal Phenomenon Necessarily Contradict the Independence Axiom?," American Economic Review, American Economic Association, vol. 78(1), pages 233-36, March.
  22. Morone, Andrea & Morone, Piergiuseppe, 2012. "Are small groups expected utility?," MPRA Paper 38198, University Library of Munich, Germany.
  23. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
  24. John Hey & Jinkwon Lee, 2005. "Do Subjects Separate (or Are They Sophisticated)?," Experimental Economics, Springer, vol. 8(3), pages 233-265, September.
  25. Carmela Di Mauro & Anna Maffioletti, 2004. "Attitudes to risk and attitudes to uncertainty: experimental evidence," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 36(4), pages 357-372.
  26. Susan K. Laury, 2006. "Pay One or Pay All: Random Selection of One Choice for Payment," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2006-24, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  27. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
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