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Market Evidence of Misperceived Prices and Mistaken Mortality Risks

  • Jay Bhattacharya
  • Dana Goldman
  • Neeraj Sood

We construct and implement a test of rational consumer behavior in a highstakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a lifethreatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.

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File URL: http://www.nber.org/papers/w9863.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9863.

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Date of creation: Jul 2003
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Publication status: published as Bhattacharya, Jay & Goldman, Dana & Sood, Neeraj, 2009. "Market evidence of misperceived mortality risk," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 451-462, October.
Handle: RePEc:nbr:nberwo:9863
Note: AG HE
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  1. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. Sendhil Mullainathan & Richard H. Thaler, 2000. "Behavioral Economics," NBER Working Papers 7948, National Bureau of Economic Research, Inc.
  5. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  6. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
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