Probability weighting and insurance demand in a unified framework

We provide a comprehensive analysis of the impact of probability weighting on optimal insurance demand in a unified framework. We identify decreasing relative overweighting as a new local condition on the probability weighting function that is useful for comparative static analysis. We discuss the effects of probability weighting on coinsurance, deductible choice, insurance demand for low-probability, high-impact risks versus high-probability, low-impact risks, and insurance demand in the presence of nonperformance risk. Probability weighting can make better or worse predictions than expected utility depending on the insurance demand problem at hand.

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Year of publication:	2022
Authors:	Jaspersen, Johannes G. ; Peter, Richard ; Ragin, Marc A.
Published in:	The Geneva Risk and Insurance Review. - Oxford, UK : Blackwell Publishing Ltd, ISSN 1554-9658. - Vol. 48.2022, 1, p. 63-109
Publisher:	Oxford, UK : Blackwell Publishing Ltd
Subject:	Insurance demand \| Probability weighting \| Non-expected utility \| Comparative statics \| Decreasing relative overweighting

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Type of publication:	Article
Type of publication (narrower categories):	Article
Language:	English
Other identifiers:	10.1057/s10713-022-00074-x [DOI]
Classification:	D11 - Consumer Economics: Theory ; D81 - Criteria for Decision-Making under Risk and Uncertainty ; G22 - Insurance; Insurance Companies
Source:	EconStor

Persistent link: https://www.econbiz.de/10015327407