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The Nature of Risk Preferences: Evidence from Insurance Choices

83 Pages Posted: 24 Jul 2010 Last revised: 7 Dec 2013

Levon Barseghyan

Cornell University

Francesca Molinari

Cornell University - Department of Economics

Ted O'Donoghue

Cornell University - Department of Economics

Joshua C. Teitelbaum

Georgetown University Law Center

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2012

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.

Keywords: deductible, insurance, probability weighting, risk aversion

JEL Classification: D01, D03, D12, D81, G22

Suggested Citation

Barseghyan, Levon and Molinari, Francesca and O'Donoghue, Ted and Teitelbaum, Joshua C., The Nature of Risk Preferences: Evidence from Insurance Choices (November 7, 2012). American Economic Review, Vol. 103, No. 6, pp. 2499-2529, 2013. Available at SSRN: https://ssrn.com/abstract=1646520 or http://dx.doi.org/10.2139/ssrn.1646520

Levon Barseghyan (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Francesca Molinari

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6367 (Phone)
607-255-2818 (Fax)

HOME PAGE: http://www.arts.cornell.edu/econ/fmolinari/

Ted O'Donoghue

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6287 (Phone)
607-255-2818 (Fax)

Joshua C. Teitelbaum

Georgetown University Law Center ( email )

600 New Jersey Avenue NW
Washington, DC 20001
United States
202-661-6589 (Phone)

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