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The Impact of Regret on the Demand for Insurance

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  • Michael Braun
  • Alexander Muermann

Abstract

We examine optimal insurance purchase decisions of individuals that exhibit behavior consistent with Regret Theory. Our model incorporates a utility function that assigns a disutility to outcomes that are ex post suboptimal, and predicts that individuals with regret‐theoretical preferences adjust away from the extremes of full insurance and no insurance coverage. This prediction holds for both coinsurance and deductible contracts, and can explain the frequently observed preferences for low deductibles in markets for personal insurance.

Suggested Citation

  • Michael Braun & Alexander Muermann, 2004. "The Impact of Regret on the Demand for Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 737-767, December.
    • Handle: RePEc:bla:jrinsu:v:71:y:2004:i:4:p:737-767
    DOI: 10.1111/j.0022-4367.2004.00110.x
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