Individual Property Risk Management

20 Pages Posted: 18 Mar 2010 Last revised: 11 Apr 2010

See all articles by Eric Belasco

Eric Belasco

Texas Tech University

Sandra J. Huston

Texas Tech University

Michael S. Finke

The American College

Date Written: January 10, 2010

Abstract

This paper reviews household property risk management and estimates normatively optimal choice under theoretical assumptions. Although risk retention limits are common in the financial planning industry, estimates of optimal risk retention that include both financial and human wealth far exceed limits commonly recommended. Households appear to frame property losses differently from other wealth losses, leading to wealth-reducing excess risk transfer. Possible theoretical explanations for excess sensitivity to loss are reviewed. Differences between observed and optimal risk management imply a large potential gain from improved choice.

Keywords: household risk, prospect theory, optimal risk retention

JEL Classification: D11, D81, G22

Suggested Citation

Belasco, Eric and Huston, Sandra J. and Finke, Michael S., Individual Property Risk Management (January 10, 2010). Available at SSRN: https://ssrn.com/abstract=1573699 or http://dx.doi.org/10.2139/ssrn.1573699

Eric Belasco

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Sandra J. Huston

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

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