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The Nature of Risk Preferences: Evidence from Insurance ChoicesLevon BarseghyanCornell University Francesca MolinariCornell University - Department of Economics Ted O'DonoghueCornell University - Department of Economics Joshua C. TeitelbaumGeorgetown University Law Center November 7, 2012 American Economic Review, Forthcoming Abstract: We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions -- characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes -- play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.
Number of Pages in PDF File: 83 Keywords: deductible, insurance, probability weighting, risk aversion JEL Classification: D01, D03, D12, D81, G22 Accepted Paper SeriesDate posted: July 24, 2010 ; Last revised: November 13, 2012Suggested CitationContact Information
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