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An Experimental Study of the Full-Coverage Puzzle

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  • Itzhak Venezia
  • Zur Shapira
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    Abstract

    One of the most intriguing questions in insurance is the preference of consumers to buy low or no deductible insurance policies. This stands in sharp contrast to the theorem, proved by Mossin, 1968, that when the price of insurance is higher than its actuarial value, then under quite reasonable assumptions full coverage is not optimal. We show in a set of experiments that amateur subjects tend to underestimate the value of a policy with a deductible and that the degree of underestimation depends on the level

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm335.

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    Date of creation: 01 Feb 2003
    Date of revision: 01 Apr 2003
    Handle: RePEc:ysm:somwrk:ysm335

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    1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    2. Johnson, Eric J, et al, 1993. " Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
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