Perceived risk and insurance decision taking for small losses

Abstract

Little systematic research has investigated differences in expressed attitude as a function of the manner in which probability information is communicated to a decision maker. The purpose of this paper is to investigate differences in expressed attitude when insurance coverage is introduced in a known-risk situation (the probability of loss is known), an uncertain situation (there is no prior information on the probability of loss) or an ambiguous (the information provided is vague). The experiments reported in this paper have been developed and tested in the classroom with undergraduate students. Unlike the vast majority of previous work dealing with lotteries and laboratory gambles, this study examine the behavior of people when facing a purchase decision on a well-known consumer good, i.e. a bottle of wine. The comparative results provide some evidence on the risk-taking behavior of consumers for small losses. Within an insurance context, people prefer the more familiar option of a known-risk situation and contrary to expectations, the results do not provide support to ambiguity aversion but to ambiguity seeking.

Keywords:

• Risk behavior
• perceived risk
• insurance purchase

JEL classification:

• C90
• D81
• D83
• G22

Notes

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Cognitive psychologists have documented many patterns regarding how people behave in different contexts (Laughhum, Payne, and Crum). Some of these patterns are known as heuristics or rules of thumb, overconfidence, mental accounting, framing, conservatism (Barberis and Thaler, 2003).

2 The review paper by Camerer and Weber (1992) provides an in-depth and thorough survey. See also Harrison (1994) for arguments on experiments.

3 See also Sarin and Weber (1993), Fox and Weber (2002), Du and Budescu (2005).

4 See Trautmann and van de Kuilen (2015) for a review of the literature.

5 There are many theories of behaviour under ambiguity. A useful survey is that of Etner, Jeleva, and Tallon (2012). 

6 Cabantous (2007) is to our knowledge the first paper to examine the comparative effects.

7 See Birnbaum and Schmidt (2008).

8 To force the demand curve to reach zero for high values, the range was selected after a few trials with different scales from [5,500].

9 Note that the known-risk situation (8.3%) is over the average value perceived by the groups.

10 Proof is given by the max-min expected utility model of Ghirardato, Marinacci, and Maccheroni (2004) and Gajdos et al. (2008).

11 Affect regarding the insured object may also have an impact on insurance decisions (Hsee and Kunreuther, 2000).

12 The willingness to pay for a bottle of wine is significantly related to price habits, the perceived risk and gender. The results are not reported here but are available from the authors.