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Probabilistic insurance

Listed author(s):
  • Wakker, P.P.

    (Tilburg University, Center For Economic Research)

  • Thaler, R.H.
  • Tversky, A.

Probabilistic insurance is an insurance policy involving a small probability that the consumer will not be reimbursed. Survey data suggest that people dislike probabilistic insurance and demand more than a 20% reduction in the premium to compensate for a 1% default risk. While these preferences are intuitively appealing they are difficult to reconcile with expected utility theory. Under highly plausible assumptions about the utility function, willingness to pay for probabilistic insurance should be very close to willingness to pay for standard insurance less the default risk. However, the reluctance to buy probabilistic insurance is predicted by the weighting function of prospect theory. This finding highlights the potential role of the weighting function to explain insurance. Copyright 1997 by Kluwer Academic Publishers

(This abstract was borrowed from another version of this item.)

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File URL: https://pure.uvt.nl/portal/files/1254276/WPPTRHTA5617298.pdf
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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-35.

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Date of creation: 1997
Handle: RePEc:tiu:tiucen:7532d1e7-187b-4418-95a1-95b199f83474
Contact details of provider: Web page: http://center.uvt.nl

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  1. Segal, Uzi, 1990. "Two-Stage Lotteries without the Reduction Axiom," Econometrica, Econometric Society, vol. 58(2), pages 349-377, March.
  2. R. Duncan Luce & Detlof von Winterfeldt, 1994. "What Common Ground Exists for Descriptive, Prescriptive, and Normative Utility Theories?," Management Science, INFORMS, vol. 40(2), pages 263-279, February.
  3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  4. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
  5. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 271-282.
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