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Market Evidence of Misperceived Prices and Mistaken Mortality Risks

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  • Jay Bhattacharya
  • Dana Goldman
  • Neeraj Sood

Abstract

We construct and implement a test of rational consumer behavior in a highstakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a lifethreatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9863.

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Date of creation: Jul 2003
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Publication status: published as Bhattacharya, Jay & Goldman, Dana & Sood, Neeraj, 2009. "Market evidence of misperceived mortality risk," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 451-462, October.
Handle: RePEc:nbr:nberwo:9863

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  1. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
  2. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  3. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  4. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  5. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  6. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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Cited by:
  1. Francesco Squintani & Alvaro Sandroni, 2007. "Overconfidence, Insurance and Paternalism," Economics Discussion Papers 643, University of Essex, Department of Economics.
  2. Yamamoto, Shinichi & Yoneyama, Takau & Kwon, W. Jean, 2012. "An Experimental Study On Adverse Selection And Moral Hazard," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 46(1), pages 51-64, January.
  3. Alma Cohen & Peter Siegelman, 2010. "Testing for Adverse Selection in Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 39-84.

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