Addresses the question of how potential insurance buyers make
decisions like these by considering the conceptual and empirical
evidence that address the following theoretical and behavioral
issues: the extent that consumers tend to follow the multiperiod
decision rules based on expected utility [E(U)] maximization; and
the factors that influence their choices when they do not behave as
if they are maximizing E(U). The principal contribution of this
monograph is to demonstrate that emotions play a role in predicting
departures from expected utility maximization for making insurance
purchasing decisions over time. The authors highlight the
conceptual issues and alternative theories of behavior about repeat
insurance purchasing over time and the empirical literature on the
proportion of consumers that buy coverage after loss-producing
events only to cancel their insurance as those events become more
distant in time. The monograph then details the findings from novel
web-based experiments that seek to determine whether people change
their insurance decisions after experiencing a loss when offered a
relatively high, medium or low premium relative to the expected
loss. Section 2 reviews the empirical evidence on deviations from
rational thinking, especially as they relate to choices about
repeated purchase over time. It also discusses the interplay
between cognitive biases generated by intuitive thinking and
emotions in changing insurance purchase decisions over time.
Section 3 details an experiment in the context of hypothetical
hurricane damage where individuals are told that loss probabilities
and premiums remain the same from period to period. Section 4
details an experiment where participants must choose between
high-deductible health insurance at a given premium and
low-deductible health insurance at a higher premium, and explores
whether they will switch from one policy to the other over time.
Section 5 draws together the findings, and provides guiding
principles of insurance and recommendations for public-private
partnerships to address the cognitive biases noted in Section 2 via
a behavioral risk audit that encourages more deliberative thinking
with respect to insurance-related choices.
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