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Valuing Protection against Low Probability, High Loss Risks: Experimental Evidence

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Listed:
  • Andrea Morone
  • Ozlem Ozdemir

Abstract

The study investigates protective responses in low probability and high loss risk situations. Particularly, it (1) detects individual protection valuations to variations in probability versus to variations in loss for payment decisions and choice decisions, (2) elicits the threshold probability in individuals’ minds that make them consider having protective measure, (3)calculates relative risk aversion. The results of the experiment indicate that as the probability of loss and loss amount increases, individuals tend to buy/pay more for protection. They are more responsive to the variation in probabilities than to the variation in loss amounts when they decide whether to buy the protective measure or not: choice decision. Yet, the opposite is true when they decide the amount of willingness to pay for buying the protective measure: payment decision. In addition, bid expected loss values have a bimodal distribution. Consistent with previous studies, individuals (particularly women) are found to be risk averse for low probabilities.

Suggested Citation

  • Andrea Morone & Ozlem Ozdemir, 2006. "Valuing Protection against Low Probability, High Loss Risks: Experimental Evidence," Papers on Strategic Interaction 2006-34, Max Planck Institute of Economics, Strategic Interaction Group.
  • Handle: RePEc:esi:discus:2006-34
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    References listed on IDEAS

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    More about this item

    Keywords

    experiments; risk; insurance;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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