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The Nature of Risk Preferences: Evidence from Insurance Choices

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Listed author(s):
  • Levon Barseghyan
  • Francesca Molinari
  • Ted O'Donoghue
  • Joshua C. Teitelbaum

Abstract

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions - characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes - play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kõszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3933.

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Date of creation: 2012
Handle: RePEc:ces:ceswps:_3933
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Find related papers by JEL classification:
  • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
  • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
  • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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  1. Loomes, Graham & Moffatt, Peter G & Sugden, Robert, 2002. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 103-130, March.
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