Probability Weighting in Damage Claiming Decisions

Abstract

Abstract: We present experimental evidence suggesting that insurance-holders ignore the possibility of damage-recurrence when deciding whether to submit a claim for a current small loss. The neglect results in successive claiming for current small damage-levels. When the probability of damage-recurrence is disclosed, subjects increase the cutoff-damage for submitting a claim; the recurrence probability is significantly overweighed in accordance with prospect theory’s principles. Our results suggest that regulatory agencies and insurance companies should consider disclosure of statistical information on damage-recurrence to insurees.

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