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American Economic Journal: Applied Economics: Vol. 2 No. 4 (October 2010)

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(Over)insuring Modest Risks

Article Citation

Sydnor, Justin. 2010. "(Over)insuring Modest Risks." American Economic Journal: Applied Economics, 2(4): 177-99.

DOI: 10.1257/app.2.4.177

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)

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Authors

Sydnor, Justin (U WI)

JEL Classifications

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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