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An experimental investigation of insurance decisions in low probability and high loss risk situations

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Abstract

This experimental study investigates insurance decisions in low-probability, high-loss risk situations. Results indicate that subjects consider the probability of loss (loss size) when they make buying decisions (paying decisions). Most individuals are risk averse with no specific threshold probability.

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Notes

  1. An alternative explanation could be that subjects behave according to prospect theory in this case they will overestimate the probability in both cases to about the same larger value.

  2. Note that “low” probability is mostly taken as 0.01 and less in the empirical literature (e.g., Camerer 1995; McClelland et al. 1993; Ganderton et al. 2000).

  3. The original instructions are in German. Instructions in English are available upon request.

  4. There is well-established experimental literature (Thaler and Johnson 1999; Plott and Zeiler 2005; Güth and Ortman 2006; Bosman and Winden 2002; Cherry et al. 2002; Bosman et al. 2005) that shows people behave, ceteris paribus, differently if their own earnings are at stake (effort experiment) than they would if a budget was provided to them like a sort of manna from heaven (no-effort experiment). (Perhaps the term ‘non-earned budget’ or ‘gift budget’ is sufficient.)

  5. The required time to complete one session was between 15 and 25 min.

  6. The four situations were randomly ordered and presented to 24 of the subjects, and the reversed random order to the remaining 24 subjects.

  7. The reason for not asking some subjects threshold questions first and then the willingness to pay questions, is that the main aim of the paper is to somehow relate the bids with the threshold probabilities. By asking the threshold questions initially, subjects most probably would have stated very high threshold probability values.

  8. Many studies have used similar random incentive mechanisms (e.g., Starmer and Sugden 1991; Hey and Lee 2005; Drehmann et al. 2007; Laury 2006).

  9. These results do not change if we use the relative WTP.

  10. In case of a small sample size (less then 25) a binomial distribution can be used to obtain the exact distribution form equivalent to the uncorrected form of the McNemar’s test statistic (Sheskin 2004).

  11. Note that the mean threshold probabilities are found to be higher for the subjects who decide to buy the insurance.

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Authors and Affiliations

  1. Department of Business Administration, Middle East Technical University, Ankara, Turkey

    Ozlem Ozdemir

  2. Dipartimento di Studi Aziendali e Giusprivatistici, Università degli Studi di Bari, Aldo Moro, Bari, Italy

    Andrea Morone

  3. Departament d’Economia, Universitat Jaune I, Castellón, Spain

    Andrea Morone

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  1. Ozlem Ozdemir
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  2. Andrea Morone
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Correspondence to Andrea Morone.

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Ozdemir, O., Morone, A. An experimental investigation of insurance decisions in low probability and high loss risk situations. J Econ Interact Coord 9, 53–67 (2014). https://doi.org/10.1007/s11403-013-0112-2

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