Skip to main content

Insurance demand and social comparison: An experimental analysis

Abstract

This paper analyzes whether social comparison can explain the low take-up of disaster insurance usually reported in field studies. We argue that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance take-up can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic. We set up a simple model with social reference points and show that in the presence of inequality aversion social comparison makes insurance indeed less attractive if risks are correlated. In addition we conducted a simple experiment which confirms these theoretical results. The average willingness to pay for insurance is significantly higher for idiosyncratic than for correlated risks.

This is a preview of subscription content, access via your institution.

References

  • Bault, N., Coricelli, G., & Rustichini, A. (2008). Interdependent utilities: how social ranking affects choice behavior. PLoS ONE, 3(10), e3477. doi:10.1371/journal.pone.0003477.

    Article  Google Scholar 

  • Browne, M. J., & Hoyt, R. E. (2000). The demand for flood insurance: empirical evidence. Journal of Risk and Uncertainty, 20, 291–306.

    Article  Google Scholar 

  • Buunk, P., & Gibbons, F. X. (2007). Social comparison: the end of a theory and the emergence of a field. Organizational Behavior and Human Decision Processes, 102, 3–21.

    Article  Google Scholar 

  • Camerer, C., & Kunreuther, H. (1989). Decision processes for low probability events: policy implications. Journal of Policy Analysis and Management, 4, 565–592.

    Article  Google Scholar 

  • Camerer, C., & Thaler, R. (1995). Ultimatums, dictators, and manners. Journal of Economic Perspectives, 9, 209–219.

    Article  Google Scholar 

  • Camerer, C., & Weber, M. (1992). Recent developments in modeling preferences: uncertainty and ambiguity. Journal of Risk and Uncertainty, 5, 325–370.

    Article  Google Scholar 

  • Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. The Quarterly Journal of Economics, 75, 643–669.

    Article  Google Scholar 

  • Fehr, E., & Schmidt, K. M. (1999). Theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, 114, 817–868.

    Article  Google Scholar 

  • Fehr, E., & Schmidt, K. M. (2006). The economics of fairness, reciprocity, and altruism—Experimental evidence and new theories. In S. C. Kolm & J. M. Ythier (Eds.), Handbook of the economics of giving, altruism and reciprocity, vol. 1 (pp. 615–691). North-Holland: Elsevier.

    Google Scholar 

  • Fox, C. R., & Tversky, A. (1995). Ambiguity aversion and comparative ignorance. The Quarterly Journal of Economics, 110, 585–603.

    Article  Google Scholar 

  • Ganderton, P., Brookshire, D., McKee, M., Stewart, S., & Thurston, H. (2000). Buying insurance for disaster-type risks: experimental evidence. Journal of Risk and Uncertainty, 20, 271–289.

    Article  Google Scholar 

  • Gill, D., & Prowse, V. (2012). A structural analysis of disappointment aversion in a real effort competition. American Economic Review, 102, 469–503.

    Article  Google Scholar 

  • Gneezy, U., & Potters, J. (1997). Experiment on risk taking and evaluating periods. Quarterly Journal of Economics, 112, 631–646.

    Article  Google Scholar 

  • Kahneman, D., & Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47, 263–291.

    Article  Google Scholar 

  • Köszegi, B., & Rabin, M. (2006). A model of reference-dependent preferences. Quarterly Journal of Economics, 121, 1133–1165.

    Article  Google Scholar 

  • Kunreuther, H., & Pauly, M. (2004). Neglecting disaster: why don’t people insure against large losses? Journal of Risk and Uncertainty, 28, 5–21.

    Article  Google Scholar 

  • Kunreuther, H., Ginsberg, R., Miller, L., Sagi, P., Slovic, P., & Borkan, B. (1978). Disaster insurance protection: Public policy lessons. New York: Wiley.

    Google Scholar 

  • Laury, S. K., McInnes, M. M., & Swarthout, J. T. (2009). Insurance decisions for low-probability losses. Journal of Risk and Uncertainty, 39, 17–44.

    Article  Google Scholar 

  • Linde, J., & Sonnemans, J. (2012). Social comparison and risky choices. Journal of Risk and Uncertainty, 44, 45–72.

    Article  Google Scholar 

  • Loewenstein, G. F., & Adler, D. (1995). A bias in the prediction of tastes. The Economic Journal, 105, 929–937.

    Article  Google Scholar 

  • McClelland, G. H., Schulze, W. D., & Coursey, D. L. (1993). Insurance for low-probability hazards: a bimodal response to unlikely events. Journal of Risk and Uncertainty, 7, 95–116.

    Article  Google Scholar 

  • Odean, T. (1998). Are investors reluctant to realize their losses? Journal of Finance, 53, 1775–1798.

    Article  Google Scholar 

  • Rabin, M. (2000). Risk aversion and expected utility theory: a calibration theorem. Econometrica, 68, 1281–1292.

    Article  Google Scholar 

  • Rohde, I., & Rohde, K. (2011). Risk attitudes in a social context. Journal of Risk and Uncertainty, 43, 205–225.

    Article  Google Scholar 

  • Samuelson, W., & Zeckhauser, R. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty, 1, 7–59.

    Article  Google Scholar 

  • Schlesinger, H. (1997). Insurance demand without the expected-utility paradigm. Journal of Risk and Insurance, 64, 19–39.

    Article  Google Scholar 

  • Schmidt, U. (2014). Insurance demand under prospect theory: a graphical analysis. Journal of Risk and Insurance, forthcoming. (in press)

  • Schmidt, U., Starmer, C., & Sugden, R. (2008). Third-generation prospect theory. Journal of Risk and Uncertainty, 36, 203–223.

    Article  Google Scholar 

  • Shamay-Tsoory, S. G., Tibi-Elhanany, Y., & Aharon-Peretz, J. (2007). The green-eyed monster and malicious joy: the neuroanatomical bases of envy and gloating (schadenfreude). Brain—A Journal of Neurology, 130, 1663–1678.

    Article  Google Scholar 

  • Slovic, P., Fischhoff, B., Lichtenstein, S., Corrigan, B., & Combs, B. (1977). Preferences for insuring against probable small losses: insurance implications. Journal of Risk and Insurance, 44, 237–257.

    Article  Google Scholar 

  • Starmer, C. (2000). Developments in non-expected utility theory: the hunt for a descriptive theory of choice under risk. Journal of Economic Literature, 38, 332–382.

    Article  Google Scholar 

  • Sugden, R. (2003). Reference-dependent subjective expected utility. Journal of Economic Theory, 111, 172–191.

    Article  Google Scholar 

  • Sydnor, J. (2010). (Over)insuring modest risks. American Economic Journal: Applied Economics, 2, 177–199.

    Article  Google Scholar 

  • Trautmann, S.T., & van de Kuilen, G. (2014). Ambiguity attitudes. Forthcoming in The Blackwell Handbook of Judgment and Decision Making. (in press)

  • Trautmann, S., & Vieider, F. M. (2012). Social influences on risk attitudes: Applications in economics. In S. Roeser, R. Hillerbrand, P. Sandin, & M. Peterson (Eds.), Handbook of risk theory (pp. 575–600). Heidelberg: Springer Verlag.

    Chapter  Google Scholar 

  • Trautmann, S., Vieider, F. M., & Wakker, P. (2011). Preference reversals for ambiguity aversion. Management Science, 57, 1320–1333.

    Article  Google Scholar 

  • Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297–323.

    Article  Google Scholar 

  • Vendrik, M. C. M., & Woltjer, G. B. (2007). Happiness and loss aversion: is utility concave or convex in relative income? Journal of Public Economics, 91, 1423–1448.

    Article  Google Scholar 

  • Wills, T. A. (1981). Downward comparison principles in social psychology. Psychological Bulletin, 90, 245–271.

    Article  Google Scholar 

Download references

Acknowledgments

We would like to thank Nicolas Treich, Stefan Trautmann and Ulrike Doerr for their helpful comments and Ute Vanini for her support in the execution of the experiment.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Ulrich Schmidt.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Friedl, A., Lima de Miranda, K. & Schmidt, U. Insurance demand and social comparison: An experimental analysis. J Risk Uncertain 48, 97–109 (2014). https://doi.org/10.1007/s11166-014-9189-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11166-014-9189-9

Keywords

  • Disaster insurance
  • Social reference points
  • Loss aversion
  • Inequality aversion

JEL Classification

  • C91
  • D03
  • D14
  • D81
  • G22