Loss Aversion Leading to Advantageous Selection

41 Pages Posted: 6 Nov 2014

See all articles by Christina Aperjis

Christina Aperjis

Hewlett-Packard Enterprise - Social Computing Lab

Filippo Balestrieri

Analysis Group, Inc.

Date Written: October 31, 2014

Abstract

Some insurance markets are characterized by “advantageous selection,” that is, ex-post risk and coverage are negatively correlated. We show that expectation-based loss aversion as in K'oszegi and Rabin (2006, 2007) provides a natural explanation for this phenomenon when agents face modest scale risks. More exposure to risk has two competing effects on an agent's willingness to pay for insurance: a positive effect, as in standard expected utility models; and a negative one, due to a reference effect. We determine conditions under which an insurance provider optimally sets a high price at which only low risk agents buy.

Keywords: loss aversion, advantageous selection, insurance

JEL Classification: D81, D82, D11, D42

Suggested Citation

Aperjis, Christina and Balestrieri, Filippo, Loss Aversion Leading to Advantageous Selection (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2517643 or http://dx.doi.org/10.2139/ssrn.2517643

Christina Aperjis

Hewlett-Packard Enterprise - Social Computing Lab ( email )

1501 Page Mill Road
Palo Alto, CA 9434
United States

Filippo Balestrieri (Contact Author)

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
53
Abstract Views
704
Rank
679,087
PlumX Metrics