Articlebronze2011

Protecting Against Low‐Probability Disasters: The Role of Worry

Christian D. Schade · Howard C. Kunreuther · Philipp Koellinger

104 citations0/0 files storedJournal of Behavioral Decision Making

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Decision-Making and Behavioral Economics Insurance and Financial Risk Management Experimental Behavioral Economics Studies

Abstract

ABTRACT We carry out a large monetary stakes insurance experiment with very small probabilities of losses and ambiguous as well as exact probabilities. Many individuals do not want to pay anything for insurance whether the probabilities are given exactly or are ambiguous. Many others, however, are willing to pay surprisingly large amounts. With ambiguity, the percentage of those paying nothing is smaller and the willingness to pay (WTP) of the other individuals larger than with exact probabilities. Comparing elasticities with ambiguity, we find that worry is much more important than subjective probability in determining WTP for insurance. Furthermore, when the ambiguous loss probability is increased by a factor of 1000, it has almost no effect on WTP. Copyright © 2011 John Wiley & Sons, Ltd.

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References

1988Prospect theory: An analysis of decision under risk 2019Theory of games and economic behavior 1961Risk, Ambiguity, and the Savage Axioms 2001Risk as feelings.1945Theory of Games and Economic Behavior 2004Heuristics and Biases: The Psychology of Intuitive Judgment 1964Measuring utility by a single-response sequential method 2002The Affect Heuristic

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