Self-protection and self-insurance in an age of anxiety

This paper extends the standard two-period prevention model by incorporating anticipatory emotions. We introduce an additional cost, referred as the emotional load, which is endogenously determined by future risk but can be mitigated by current preventive effort. We show that a more intense emotional load incentivizes the emotional agent to increase investment in either self-insurance or self-protection. By contrast, greater uncertainty sensitivity has an ambiguous effect: It depends on the curvature of the emotional load function and wealth. When savings are substitutes, the effect of these parameters may diverge, whereas they align when savings are complements to risk prevention. Finally contrasting our setting with a setting without uncertainty or emotions, we show that, under prudence, the introduction of a zero-mean risk leads to a higher optimal level of self-insurance. Anxiety amplifies the incentive to reduce risk by lowering present well-being.