2016/01/01 by Glenn W. Harrison, Jia Min Ng · 3 citations
Decision Sciences · Economics, Econometrics and Finance · Social Sciences · #Decision-Making and Behavioral Economics #Economic and Environmental Valuation #Experimental Behavioral Economics Studies
paper · doi:10.1111/jori.12142
crossref issued 2016/01/01 · crossref published 2016/01/01 · crossref published-print 2016/01/01 · openalex publication_date 2016/01/01 · crossref published-online 2016/02/17 · crossref created 2016/02/20 · openalex created_date 2016/06/24 · crossref deposited 2023/10/04 · openalex updated_date 2026/07/31 · crossref indexed 2026/07/31
A BSTRACT Economic theory tells us how to evaluate the expected welfare gain from insurance products on offer to individuals. If we know the risk preferences of the individual, and subjective beliefs about loss contingencies and likelihood of payout, there is a certainty equivalent of the risky insurance policy that can be compared to the certain insurance premium. This simple logic extends to nonstandard models of risk preferences, such as those in which individuals exhibit “optimism” or “pessimism” about loss contingencies in their evaluation of the risky insurance policy. We illustrate the application of these basic ideas about the welfare evaluation of insurance policies in a controlled laboratory experiment. We estimate the risk preferences of individuals from one task, and separately present the individual with a number of insurance policies in which loss contingencies are objective. We then estimate the expected consumer surplus gained or foregone from observed take‐up decisions. There is striking evidence of foregone expected consumer surplus from incorrect take‐up decisions. Indeed, the metric of take‐up itself, widely used in welfare evaluations of insurance products, provides a qualitatively incorrect guide to the expected welfare effects of insurance.