Be Cautious in the Last Month: The Sunk Cost Fallacy Held by Car Insurance Policyholders

Ma, C. (2021), Be Cautious in the Last Month: The Sunk Cost Fallacy Held by Car Insurance Policyholders. International Economic Review. Accepted Author Manuscript. https://doi.org/10.1111/iere.12512

95 Pages Posted: 22 Mar 2021

See all articles by Chao Ma

Chao Ma

WISE & SOE, Xiamen University

Date Written: March 8, 2021

Abstract

Investigating a unique large dataset, we find that automobile insurance policyholders are more likely to encounter accidents during the last month of the insurance policy term than during any other month. Our interpretation is that this effect is driven by the sunk cost fallacy held by policyholders, which exacerbates their moral hazard. The explanation is that in the last month, policyholders may become concerned that they may “waste” the premiums paid upfront if they have not encountered an accident before the policy expires; thus, they will reduce their accident-prevention efforts, although the premiums are sunk costs and cannot be reversed.

Keywords: sunk cost fallacy; moral hazard; mental accounting; salience; automobile insurance; car accidents; irrational behavior; behavioral bias

JEL Classification: D9, L8, G4

Suggested Citation

Ma, Chao, Be Cautious in the Last Month: The Sunk Cost Fallacy Held by Car Insurance Policyholders (March 8, 2021). Ma, C. (2021), Be Cautious in the Last Month: The Sunk Cost Fallacy Held by Car Insurance Policyholders. International Economic Review. Accepted Author Manuscript. https://doi.org/10.1111/iere.12512, Available at SSRN: https://ssrn.com/abstract=3799954

Chao Ma (Contact Author)

WISE & SOE, Xiamen University ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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