Abstract
Using interviews with 74 drivers, we elicit and analyse how people think about collision coverage and, more generally, about insurance decisions. We compare the judgments and behaviours of these decision makers to the predictions of a range of theoretical models: (a) A model developed by Lee (2007), which refines EU theory to incorporate income and predicts that property insurance is a
normal good; (b) a mental accounting model based on the idea that consumers budget their income across consumption categories (Thaler, 1985); and (c) the baseline, classic EU theory, which predicts that insurance is an inferior good (Mossin, 1968). The behaviour reported by subjects in our study suggests that insurance is a normal good, while their verbal reports reveal desires to balance two
conflicting goals in deductible decisions, keeping premiums “affordable” and keeping deductibles “affordable,” which suggests a cognitive model based on budgeting. Our findings emphasize the importance of budget constraints, which lead consumers to budget their income across consumption categories. We find also that a simple heuristic accounts for many collision coverage decisions:
purchase coverage for cars worth more than some minimum value.
normal good; (b) a mental accounting model based on the idea that consumers budget their income across consumption categories (Thaler, 1985); and (c) the baseline, classic EU theory, which predicts that insurance is an inferior good (Mossin, 1968). The behaviour reported by subjects in our study suggests that insurance is a normal good, while their verbal reports reveal desires to balance two
conflicting goals in deductible decisions, keeping premiums “affordable” and keeping deductibles “affordable,” which suggests a cognitive model based on budgeting. Our findings emphasize the importance of budget constraints, which lead consumers to budget their income across consumption categories. We find also that a simple heuristic accounts for many collision coverage decisions:
purchase coverage for cars worth more than some minimum value.
Original language | English |
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Publication date | 2009 |
Number of pages | 32 |
Publication status | Published - 2009 |
Event | Strategic Risk Management : Strategy as Risk Management and Risk Management as Strategy : A Mental Models Approach to Theory Testing and Refinement - København, Denmark Duration: 16 Jun 2009 → 16 Jun 2009 |
Conference
Conference | Strategic Risk Management : Strategy as Risk Management and Risk Management as Strategy : A Mental Models Approach to Theory Testing and Refinement |
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Country/Territory | Denmark |
City | København |
Period | 16/06/2009 → 16/06/2009 |