Information Effects and Decision under Uncertainty
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Amit Gandhi, University of Pennsylvania
On Information and the Demand for Insurance
AbstractNew computing tools and big data are transforming the insurance industry. Insurers may now have more information about underlying risks than consumers do. We evaluate the individual and market equilibrium effects of this rising information asymmetry using an incentivized survey. We find that consumers are willing to pay higher premiums for insurance when there is uncertainty about underlying risks, which leads to a right-ward shift in demand for insurance. Importantly, we find that the information premium is negatively correlated with risk aversion, which leads to a selection effect. Individuals who are willing to pay more for insurance when underlying risk information is uncertain are not necessarily those who are most risk averse. We show that these effects can lead to substantial reductions in consumer welfare and induce insurers to selectively disclose information to consumers depending on their risk profile.
Relative Thinking and Risk Attitudes
AbstractIn this paper, we provide a model of context-dependent risk preferences by integrating our model of relative thinking (Bushong, Rabin, and Schwartzstein 2017)—wherein choices are distorted by the range of attribute values along given dimensions—with reference-dependent preferences (Koszegi and Rabin 2009). Our critical assumption is that the decision-maker’s utility is composed of two parts (consumption utility and gain-loss utility) and that these form the dimensions along which range effects may alter the decision-maker’s evaluations. Combining these models yields two major insights. First, there is a global component to risk preferences: A person who is more risk averse than another person in one context tends to be more risk averse in another. Second, there is a domain-specific nature to risk preferences: Exposure to bigger risks makes a person less risk averse. For example, if a homeowner is required to purchase an insurance policy, then adding policies with higher deductibles and lower premia to an existing menu can only lead a person to choose higher deductible policies. The analysis sheds light on evidence of certain context effects in risky choice, such as Post, van den Assem, Baltussen, and Thaler (2008), whereby people display less risk aversion in small to medium stakes decisions when they expect to have the option to take risks that involve bigger stakes.
Different Contexts, Different Risk Preferences?
AbstractWe examine the stability of risk preferences across contexts involving different stakes. Using data on households' deductible choices in three property insurance coverages and their limit choices in two liability insurance coverages, we assess the stability across the five contexts in the ordinal ranking of the households' willingness to bear risk. We find evidence of stability across contexts involving stakes of the same magnitude, but not across contexts involving stakes of very different magnitudes. Our results appear to be robust to heterogeneity in wealth and access to credit, complicating seemingly ready explanations
- D1 - Household Behavior and Family Economics
- D8 - Information, Knowledge, and Uncertainty