The Impact of Insurance Prices on Decision-Making Biases: An Experimental Analysis

20 Pages Posted: 30 Mar 2006

See all articles by Susan Laury

Susan Laury

Georgia State University - Andrew Young School of Policy Studies

Melayne Morgan McInnes

University of South Carolina - Darla Moore School of Business

Date Written: August 2002

Abstract

This paper tests whether the use of endogenous risk categorization by insurers enables consumers to make better-informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether or not one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so, however fewer subjects purchase insurance when the probability of a loss is higher.

Suggested Citation

Laury, Susan and McInnes, Melayne Morgan, The Impact of Insurance Prices on Decision-Making Biases: An Experimental Analysis (August 2002). Andrew Young School of Policy Studies Research Paper Series No. 06-15, Available at SSRN: https://ssrn.com/abstract=893820 or http://dx.doi.org/10.2139/ssrn.893820

Susan Laury (Contact Author)

Georgia State University - Andrew Young School of Policy Studies ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

Melayne Morgan McInnes

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

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