American Economic Journal:
Applied Economics
ISSN 1945-7782 (Print) | ISSN 1945-7790 (Online)
(Over)insuring Modest Risks
American Economic Journal: Applied Economics
vol. 2,
no. 4, October 2010
(pp. 177–99)
Abstract
Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers' choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs significantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed. (JEL D14, D81, G21, G22)Citation
Sydnor, Justin. 2010. "(Over)insuring Modest Risks." American Economic Journal: Applied Economics, 2 (4): 177–99. DOI: 10.1257/app.2.4.177Additional Materials
JEL Classification
- D14 Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G22 Insurance; Insurance Companies
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