Boundedly Rational Expectations in Insurance Decision Making: Experimental and Field Evidence

44 Pages Posted: 22 Jun 2013

See all articles by Robin Chark

Robin Chark

National University of Singapore - Department of Marketing

Vincent Mak

University of Cambridge - Cambridge Judge Business School

A. V. Muthukrishnan

Hong Kong University of Science & Technology (HKUST) - Department of Marketing

Date Written: June 1, 2013

Abstract

We examine a type of behavioral regularities in insurance decision making, namely instances when consumers do not fully take into account the informational value of the insurer’s offered premium. Specifically, we study scenarios when the consumer is less informed about the loss probability than the insurer. We examine basic violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premise that the insurer must seek to break even or earn a profit over the risk to be covered. We report a field study and an experiment that reveal systematic occurrence of such violations. Violations were especially frequent at low premium levels, and the demand for insurance had an inverted-U dependence on the premium. Our findings suggest that, when consumers form beliefs over the loss probability, they take into account the offered premium to some extent, but often insufficiently so.

Keywords: insurance, rational expectations, cursedness, bounded rationality, behavioral economics

JEL Classification: D03, G22, C90

Suggested Citation

Chark, Robin and Mak, Vincent and Muthukrishnan, A. V., Boundedly Rational Expectations in Insurance Decision Making: Experimental and Field Evidence (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2282889 or http://dx.doi.org/10.2139/ssrn.2282889

Robin Chark (Contact Author)

National University of Singapore - Department of Marketing ( email )

NUS Business School
Mochtar Riady Building, BIZ 1, #08-16
Singapore, Singapore 119245
Singapore

Vincent Mak

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 764295 (Phone)
+44 (0)1223 339701 (Fax)

A. V. Muthukrishnan

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

Department of Marketing
Clear Water Bay, Kowloon
Hong Kong
+852 2358 7715 (Phone)
+852 2358 2429 (Fax)

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