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Choices at various levels of uncertainty: An experimental test of the restated diversification theorem

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Abstract

Our “Restated diversification theorem” (Skogh and Wu, 2005) says that risk-averse agents may pool risks efficiently without assignment of subjective probabilities to outcomes, also at genuine uncertainty. It suffices that the agents presume that they face equal risks. Here, the theorem is tested in an experiment where the probability of loss, and the information about this probability, varies. The result supports our theorem. Moreover, it tentatively supports an evolutionary theory of the insurance industry—starting with mutual pooling at uncertainty, turning into insurance priced ex ante when actuarial information is available.

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Authors and Affiliations

  1. Centre for Labour Market Policy Research (CAFO), School of Management and Economics, Växjö University, SE-351 95, Växjö, Sweden

    Ali M. Ahmed

  2. Department of Management and Economics, Linköping University, SE-581 83, Linköping, Sweden

    Göran Skogh

Authors
  1. Ali M. Ahmed
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  2. Göran Skogh
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Corresponding author

Correspondence to Göran Skogh.

Additional information

JEL Classification D8, G22, C91, C92

Thanks are due to Jochen Bigus, Fredrik Carlsson, Johan Eklund, Krister Hjalte, Håkan J. Holm, Eva Leander, Hong Wu, a referee, and the students participating in the experiment.

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Ahmed, A.M., Skogh, G. Choices at various levels of uncertainty: An experimental test of the restated diversification theorem. J Risk Uncertainty 33, 183–196 (2006). https://doi.org/10.1007/s11166-006-0332-0

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  • DOI: https://doi.org/10.1007/s11166-006-0332-0

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