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Affective Decision Making in Insurance Markets

  • Anat Bracha
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    This paper suggests incorporating affective considerations into decision making theory and insurance decision in particular. I describe a decision maker with two internal accounts - the rational account and the mental account. The rational account decides on insurance to maximize expected (perceived) utility, while the mental account chooses risk perceptions which then affect the perceived expected utility. The two accounts interact to reach a decision which is composed of both risk perception and insurance level. The model is based on psychology research and shows interesting results for the insurance markets. Also, this framework helps to distinguish between report and choice tasks.

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    File URL: http://icfpub.som.yale.edu/publications/2665
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    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2665.

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    Date of creation: 01 Jan 2004
    Date of revision: 01 Sep 2004
    Handle: RePEc:ysm:somwrk:amz2665
    Contact details of provider: Web page: http://icf.som.yale.edu/

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    1. John Cawley & Tomas Philipson, 1997. "An Empirical Examination of Information Barriers to Trade inInsurance," University of Chicago - George G. Stigler Center for Study of Economy and State 132, Chicago - Center for Study of Economy and State.
    2. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-38, September.
    3. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    4. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-19, June.
    5. Alarie, Yves & Dionne, Georges, 2001. " Lottery Decisions and Probability Weighting Function," Journal of Risk and Uncertainty, Springer, vol. 22(1), pages 21-33, January.
    6. Leeat Yariv, 2001. "Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals," Cowles Foundation Discussion Papers 1344, Cowles Foundation for Research in Economics, Yale University.
    7. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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