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Choices at various levels of uncertainty: An experimental test of the restated diversification theorem

  • Ali Ahmed

    ()

  • Göran Skogh

    ()

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    Our “Restated diversification theorem” (Skogh and Wu, 2005) says that risk-averse agents may pool risks efficiently without assignment of subjective probabilities to outcomes, also at genuine uncertainty. It suffices that the agents presume that they face equal risks. Here, the theorem is tested in an experiment where the probability of loss, and the information about this probability, varies. The result supports our theorem. Moreover, it tentatively supports an evolutionary theory of the insurance industry—starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available. Copyright Springer Science + Business Media, LLC 2006

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    File URL: http://hdl.handle.net/10.1007/s11166-006-0332-0
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    Article provided by Springer in its journal Journal of Risk and Uncertainty.

    Volume (Year): 33 (2006)
    Issue (Month): 3 (December)
    Pages: 183-196

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    Handle: RePEc:kap:jrisku:v:33:y:2006:i:3:p:183-196
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100299

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    1. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    2. Sarin, Rakesh K & Winkler, Robert L, 1992. " Ambiguity and Decision Modeling: A Preference-Based Approach," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 389-407, October.
    3. Michael G Faure & G�ran Skogh, 1992. "Compensation for Damages Caused by Nuclear Accidents: A Convention as Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 17(4), pages 499-513, October.
    4. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. Camerer, Colin & Kunreuther, Howard, 1989. " Experimental Markets for Insurance," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 265-99, September.
    6. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
    7. Sinn, Hans-Werner, 1980. "A Rehabilitation of the Principle of Insufficient Reason," Munich Reprints in Economics 19914, University of Munich, Department of Economics.
    8. Goeran Skogh, 1999. "Risk-Sharing Institutions for Unpredictable Losses," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(3), pages 505-, September.
    9. Bernasconi, Michele, 1992. " Different Frames for the Independence Axiom: An Experimental Investigation in Individual Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 5(2), pages 159-74, May.
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