Arbeitspapier

Insurance demand and prospect theory

Empirical evidence has shown that people are unwilling to insure rare losses at subsidized premiums and at the same time take-up insurance for moderate risks at highly loaded premiums. This paper explores whether prospect theory, in particular diminishing sensitivity and loss aversion, can accommodate this evidence. A crucial factor for applying prospect theory to insurance problems is the choice of the reference point. We motivate and explore two possible reference points, state-dependent initial wealth and final wealth after buying full insurance. It turns out that particularly the latter reference point seems to provide a realistic explanation of the empirical evidence.

Sprache
Englisch

Erschienen in
Series: Kiel Working Paper ; No. 1750

Klassifikation
Wirtschaft
Household Saving; Personal Finance
Criteria for Decision-Making under Risk and Uncertainty
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Thema
insurance demand
prospect theory
flood insurance
diminishing sensitivity
loss aversion
Elementarschadenversicherung
Konsumentenverhalten
Prospect Theory
Theorie

Ereignis
Geistige Schöpfung
(wer)
Schmidt, Ulrich
Ereignis
Veröffentlichung
(wer)
Kiel Institute for the World Economy (IfW)
(wo)
Kiel
(wann)
2012

Handle
Letzte Aktualisierung
10.03.2025, 11:41 MEZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Schmidt, Ulrich
  • Kiel Institute for the World Economy (IfW)

Entstanden

  • 2012

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