Protecting Against Low-Probability Disasters: The Role of Worry

Christian Schade*, Howard Kunreuther, Philipp Koellinger

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We carry out a large monetary stakes insurance experiment with very small probabilities of losses and ambiguous as well as exact probabilities. Many individuals do not want to pay anything for insurance whether the probabilities are given exactly or are ambiguous. Many others, however, are willing to pay surprisingly large amounts. With ambiguity, the percentage of those paying nothing is smaller and the willingness to pay (WTP) of the other individuals larger than with exact probabilities. Comparing elasticities with ambiguity, we find that worry is much more important than subjective probability in determining WTP for insurance. Furthermore, when the ambiguous loss probability is increased by a factor of 1000, it has almost no effect on WTP.

Original languageEnglish
Pages (from-to)534-543
Number of pages10
JournalJournal of Behavioral Decision Making
Volume25
Issue number5
DOIs
Publication statusPublished - 1 Dec 2012
Externally publishedYes

Keywords

  • Ambiguity
  • Large stake experiment
  • Low-probability disasters
  • Protective decisions
  • Worry

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