Availability Heuristic and Gambler's Fallacy over Time in a Natural Disaster Insurance Choice Setting

Abstract

We carry out a repeated game of demand for typhoon insurance in China to study how the availability heuristic and gambler’s fallacy affect that demand in both short term and long terms. We find that after people experience the first typhoon in the experiment, the availability heuristic dominates their demand for insurance in the short term. Those who experience additional typhoons are more strongly influenced by the gambler’s fallacy though. Females are more likely to be susceptible to the availability heuristic and males to the gambler’s fallacy. We also compared our findings to those of Kunreuther and Michel-Kerjan (2015) in the U.S. and found that respondents from both nations exhibit similar behavioral pattern, except that Chinese seem more susceptible to the influence of availability heuristic. Our analysis reveals that the market fluctuation caused by availability heuristic and gambler’s fallacy is a short term phenomenon. Measures to mediate short-term fluctuations are discussed.

Keywords: Experiment in China, Availability Heuristic, Gambler's Fallacy, Natural Disaster, Insurance Demand

JEL Classification: D03, D22, D54