Neglecting Disaster: Why Don't People Insure Against Large Losses?
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This paper provides a theoretical explanation for the common observation that people often fail to purchase insurance against low-probability high-loss events even when it is offered at favorable premiums. We hypothesize that individuals maximize expected utility but face an explicit or implicit cost to discovering the true probability of rare events. This cost constitutes a threshold that may inhibit purchase but may be offset in several ways by suppliers of insurers and state regulators.
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Journal of Risk and Uncertainty
Volume 28, Issue 1 , pp 5-21
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- 1. Department of Operations and Information Management, The Wharton School, University of Pennsylvania, 563 Jon M. Huntsman Hall, Philadelphia, PA, 19104
- 2. Department of Health Care Systems, The Wharton School, University of Pennsylvania, Room 208 Colonial Penn Center, 3641 Locust Walk, Philadelphia, PA, 19104