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Neglecting Disaster: Why Don't People Insure Against Large Losses?

  • Howard Kunreuther


  • Mark Pauly


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    This paper provides a theoretical explanation for the common observation that people often fail to purchase insurance against low-probability high-loss events even when it is offered at favorable premiums. We hypothesize that individuals maximize expected utility but face an explicit or implicit cost to discovering the true probability of rare events. This cost constitutes a threshold that may inhibit purchase but may be offset in several ways by suppliers of insurers and state regulators. Copyright Kluwer Academic Publishers 2004

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    Article provided by Springer in its journal Journal of Risk and Uncertainty.

    Volume (Year): 28 (2004)
    Issue (Month): 1 (January)
    Pages: 5-21

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    Handle: RePEc:kap:jrisku:v:28:y:2004:i:1:p:5-21
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    1. Kunreuther, Howard & Hogarth, Robin & Meszaros, Jacqueline, 1993. " Insurer Ambiguity and Maarket Failure," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 71-87, August.
    2. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
    3. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. " Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-20, September.
    4. Robin M. Hogarth & Howard Kunreuther, 1992. "Pricing Insurance and Warranties: Ambiguity and Correlated Risks," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 17(1), pages 35-60, June.
    5. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
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