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http://hdl.handle.net/10419/55277
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| Title: | | Insurance demand and prospect theory  |
| Authors: | | Schmidt, Ulrich |
| Issue Date: | | 2012 |
| Series/Report no.: | | Kiel Working Papers 1750 |
| Abstract: | | 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. |
| Subjects: | | insurance demand prospect theory flood insurance diminishing sensitivity loss aversion |
| JEL: | | D14 D81 G21 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Publikationen von Forscherinnen und Forschern des IfW Economists Online Kieler Arbeitspapiere, IfW
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