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Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up

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  • Cai, Jing
  • Song, Changcheng
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Abstract

This paper uses a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, we conduct a set of insurance games with a random subset of farmers. Our findings show that playing insurance games improves insurance take-up in real life by 48%. Exploring the mechanism behind this effect, we show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance game. Moreover, we find that, compared with experience with real disasters in the previous year, the hypothetical experience gained in the insurance game has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46862.

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Date of creation: 09 May 2013
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Handle: RePEc:pra:mprapa:46862

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Keywords: Insurance; Take-up; Game; Experience; Learning;

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  1. Dean Karlan & Christopher Udry & Isaac Osei-Akoto & Robert Darko Osei, 2012. "Agricultural Decisions after Relaxing Credit and Risk Constraints," Working Papers 1019, Economic Growth Center, Yale University.
  2. Markku Kaustia & Samuli Knüpfer, 2008. "Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions," Journal of Finance, American Finance Association, vol. 63(6), pages 2679-2702, December.
  3. Liran Einav & Amy Finkelstein & Jonathan Levin, 2010. "Beyond Testing: Empirical Models of Insurance Markets," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 311-336, 09.
  4. Robert S. Gazzale & Julian Jamison & Alexander Karlan & Dean S. Karlan, 2009. "Ambiguous Solicitation: Ambiguous Prescription," Department of Economics Working Papers 2009-02, Department of Economics, Williams College.
  5. Simonsohn, Uri & Karlsson, Niklas & Loewenstein, George & Ariely, Dan, 2008. "The tree of experience in the forest of information: Overweighing experienced relative to observed information," Games and Economic Behavior, Elsevier, vol. 62(1), pages 263-286, January.
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