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Insurance for Low-Probability Hazards: A Bimodal Response to Unlikely Events

Listed author(s):
  • McClelland, Gary H
  • Schulze, William D
  • Coursey, Don L
Registered author(s):

    Two insurance experiments using real-money consequences and multiple rounds to provide experience are described. In the first experiment, subjects bid for insurance to prevent a fixed loss of $4 at probabilities ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of .01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than expected value). A second experiment explored this bimodality at a probability of .01 with loss increased to $40. A similar bimodal distribution was obtained that persisted over 50 rounds of experience. These laboratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to worry too much about them. Copyright 1993 by Kluwer Academic Publishers

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

    Volume (Year): 7 (1993)
    Issue (Month): 1 (August)
    Pages: 95-116

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    Handle: RePEc:kap:jrisku:v:7:y:1993:i:1:p:95-116
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