Prospect Theory and Insurance Behavior

Kunreuther, H.C., Sanderson, W.C., & Vetschera, R. (1982). Prospect Theory and Insurance Behavior. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-82-013

Preview

Text CP-82-013.pdf Download (194kB) | Preview

Abstract

This paper provides analysts with an alternative way of thinking about insurance purchase behavior that may be more natural than the traditional approach which assumes that people purchase specific contingent claims. In our formulation individuals are assumed to insure themselves against specific amounts of coverage which will protect them from a series of different states of nature where losses fall within a specific range. Insurance firms tend to market coverage in this manner: they offer $x worth of protection or $y deductible against a class of different events and set their premiums accordingly.

Here we investigate the implications on consumer choice of a convex utility or value function. The same conceptual framework can be utilized to characterize behavior if the utility or value function is concave in the loss domain.

Actions (login required)

View Item