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Risk Aversion, Loss Aversion, and the Demand for Insurance

Author

Listed:
  • Louis Eeckhoudt

    () (Department of Economics and Quantitative Methods, IÉSEG School of Management, 3 rue de la Digue, 59000 Lille, France)

  • Anna Maria Fiori

    () (Department of Statistics and Quantitative Methods, University of Milano-Bicocca, Via Bicocca degli Arcimboldi 8, 20126 Milano, Italy)

  • Emanuela Rosazza Gianin

    () (Department of Statistics and Quantitative Methods, University of Milano-Bicocca, Via Bicocca degli Arcimboldi 8, 20126 Milano, Italy)

Abstract

In this paper we analyze insurance demand when the utility function depends both upon final wealth and the level of losses or gains relative to a reference point. Besides some comparative statics results, we discuss the links with first-order risk aversion, with the Omega measure, and with a tendency to over-insure modest risks that has been been extensively documented in real insurance markets.

Suggested Citation

  • Louis Eeckhoudt & Anna Maria Fiori & Emanuela Rosazza Gianin, 2018. "Risk Aversion, Loss Aversion, and the Demand for Insurance," Risks, MDPI, Open Access Journal, vol. 6(2), pages 1-19, May.
  • Handle: RePEc:gam:jrisks:v:6:y:2018:i:2:p:60-:d:149051
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    References listed on IDEAS

    as
    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Wang, Shaun S. & Young, Virginia R., 1998. "Ordering risks: Expected utility theory versus Yaari's dual theory of risk," Insurance: Mathematics and Economics, Elsevier, vol. 22(2), pages 145-161, June.
    3. Cox, James C. & Sadiraj, Vjollca, 2006. "Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory," Games and Economic Behavior, Elsevier, vol. 56(1), pages 45-60, July.
    4. Ulrich Schmidt & Chris Starmer & Robert Sugden, 2008. "Third-generation prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 203-223, June.
    5. Doherty, Neil A & Eeckhoudt, Louis, 1995. "Optimal Insurance without Expected Utility: The Dual Theory and the Linearity of Insurance Contracts," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 157-179, March.
    6. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    7. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    8. Ulrich Schmidt, 2016. "Insurance Demand Under Prospect Theory: A Graphical Analysis," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 77-89, January.
    9. Bertrand, Philippe & Prigent, Jean-luc, 2011. "Omega performance measure and portfolio insurance," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1811-1823, July.
    10. Yusufcan Masatlioglu & Collin Raymond, 2016. "A Behavioral Analysis of Stochastic Reference Dependence," American Economic Review, American Economic Association, vol. 106(9), pages 2760-2782, September.
    11. Meyer, Jack & Ormiston, Michael B, 1999. "Analyzing the Demand for Deductible Insurance," Journal of Risk and Uncertainty, Springer, vol. 18(3), pages 223-230, October.
    12. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," CORE Discussion Papers RP 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    More about this item

    Keywords

    first-order risk aversion; stochastic dominance; insurance; expected utility;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

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