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Title:The nature of risk preferences: Evidence from insurance choices PDF Logo
Authors:Barseghyan, Levon
Molinari, Francesca
O'Donoghue, Ted
Teitelbaum, Joshua C.
Issue Date:2012
Series/Report no.:CESifo Working Paper: Behavioural Economics 3933
Abstract:We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates standard risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions - characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes - play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kõszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.
JEL:D01
D03
D12
D81
G22
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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