Journal of Risk and Uncertainty

, Volume 28, Issue 1, pp 5–21

Neglecting Disaster: Why Don't People Insure Against Large Losses?

Abstract

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.

decision-making search uncertainty information insurance 

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Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  1. 1.Department of Operations and Information Management, The Wharton SchoolUniversity of PennsylvaniaPhiladelphia
  2. 2.Department of Health Care Systems, The Wharton SchoolUniversity of PennsylvaniaPhiladelphia

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