Risk Preferences Over Small Stakes: Evidence from Deductible Choice

Abstract:     
This paper provides new field evidence on risk preferences over small stakes. Using unique population and survey data on deductible choice in Dutch universal health insurance, we find that risk preferences are a dominant factor in decision-making. In fact, our results indicate that risk preferences are both statistically and quantitatively more significant in explaining deductible choice behavior than risk type. This finding contrasts with classical expected utility theory, as it implies risk neutrality over small stakes. More recently developed reference-dependent utility models, however, can rationalize risk aversion over small stakes, on account of loss aversion and narrow framing.

Number of Pages in PDF File: 33

Keywords: consumer preferences, insurance, deductible, decision making, loss aversion

JEL Classification: D12, D81, G22

working papers series