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Narrow Framing and Life Insurance

  • Daniel Gottlieb
  • Kent Smetters

Life insurance is a large yet poorly understood industry. A final death benefit is not paid for a majority of policies. Insurers make money on customers that lapse their policies and lose money on customers that keep their coverage. Policy loads are inverted relative to the dynamic pattern consistent with reclassification risk insurance. As an industry, insurers lobby to ban secondary markets despite the liquidity provided. These (and other) stylized facts cannot easily be explained by information problems alone. We demonstrate that a simple model of narrow framing, where consumers do not fully account for their need for future liquidity when purchasing insurance, offers a simple and unified explanation.

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File URL: http://www.nber.org/papers/w18601.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18601.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18601
Note: AG IO
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  1. Hanming Fang & Edward Kung, 2010. "How Does Life Settlement Affect the Primary Life Insurance Market?," NBER Working Papers 15761, National Bureau of Economic Research, Inc.
  2. Nicholas Barberis & Ming Huang & Richard H. Thaler, 2006. "Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing," American Economic Review, American Economic Association, vol. 96(4), pages 1069-1090, September.
  3. John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc.
  4. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  5. Erik Eyster & Georg Weizsäcker, 2011. "Correlation Neglect in Financial Decision-Making," Discussion Papers of DIW Berlin 1104, DIW Berlin, German Institute for Economic Research.
  6. Michael D. Grubb, 2006. "Selling to Overconfident Consumers," Discussion Papers 06-018, Stanford Institute for Economic Policy Research.
  7. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 299-328.
  8. Glenn Daily & Igal Hendel & Alessandro Lizzeri, 2008. "Does the Secondary Life Insurance Market Threaten Dynamic Insurance?," American Economic Review, American Economic Association, vol. 98(2), pages 151-56, May.
  9. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
  10. Daniel Gottlieb, 2008. "Competition over Time-Inconsistent Consumers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(4), pages 673-684, 08.
  11. Patrick L. Warren & Daniel H. Wood, 2014. "The Political Economy Of Regulation In Markets With Naïve Consumers," Journal of the European Economic Association, European Economic Association, vol. 12(6), pages 1617-1642, December.
  12. Eliaz, Kfir & Spiegler, Ran, 2008. "Consumer optimism and price discrimination," Theoretical Economics, Econometric Society, vol. 3(4), December.
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