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Probabilistic insurance


  • 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.)

Suggested Citation

  • Wakker, P.P. & Thaler, R.H. & Tversky, A., 1997. "Probabilistic insurance," Discussion Paper 1997-35, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:7532d1e7-187b-4418-95a1-95b199f83474

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    References listed on IDEAS

    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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    More about this item


    decision making; insurance; probability;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty


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