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Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up

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  • Cai, Jing
  • Song, Changcheng

Abstract

This paper uses a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, we conduct a set of insurance games with a random subset of farmers. Our findings show that playing insurance games improves insurance take-up in real life by 48%. Exploring the mechanism behind this effect, we show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance game. Moreover, we find that, compared with experience with real disasters in the previous year, the hypothetical experience gained in the insurance game has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.

Suggested Citation

  • Cai, Jing & Song, Changcheng, 2013. "Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up," MPRA Paper 46862, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:46862
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    References listed on IDEAS

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    5. Jing Cai & Alain De Janvry & Elisabeth Sadoulet, 2015. "Social Networks and the Decision to Insure," American Economic Journal: Applied Economics, American Economic Association, vol. 7(2), pages 81-108, April.
    6. Ernst Fehr & Lorenz Goette, 2007. "Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment," American Economic Review, American Economic Association, vol. 97(1), pages 298-317, March.
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    Cited by:

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    2. Xiao Lin, 2020. "Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 351-380, June.
    3. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.
    4. Pitthan, Francisco & De Witte, Kristof, 2021. "Puzzles of insurance demand and its biases: A survey on the role of behavioural biases and financial literacy on insurance demand," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).

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    Keywords

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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