Optimism Bias and the Demand for Insurance

31 Pages Posted: 10 Aug 2011 Last revised: 9 Jan 2019

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate

James I. Hilliard

W.A. Franke College of Business

Date Written: December 2018

Abstract

We explore the effects that optimism bias has on the demand for insurance. Our theory is based on a simple binomial model of the demand for insurance in which consumers make optimistically biased assessments concerning the likelihood of future outcomes. From this model, we derive an insurance demand equation from which we obtain empirically testable predictions based on comparative static analysis. Our empirical study considers the demand for health insurance, and empirical results largely support our theory, in that we find that insurance demand is increasing in wealth and decreasing in optimism bias, premium loading, and the joint interaction between optimism bias and premium loading.

Keywords: insurance demand, health insurance, optimism bias

JEL Classification: D81, G22, H51, I11, I13

Suggested Citation

Dicks, David L. and Garven, James R. and Hilliard, James I., Optimism Bias and the Demand for Insurance (December 2018). Available at SSRN: https://ssrn.com/abstract=1907463 or http://dx.doi.org/10.2139/ssrn.1907463

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

James R. Garven (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

One Bear Place #98004
Baylor University
Waco, TX 76798-8004
United States

HOME PAGE: http://business.baylor.edu/directory/?id=James_Garven

James I. Hilliard

W.A. Franke College of Business ( email )

PO Box 15066
Flagstaff, AZ 86011
United States
928-523-7901 (Phone)

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