The effect of ambiguity on risk management choices: An experimental study (original) (raw)
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SSRN Electronic Journal, 2013
The purpose of this paper is to examine whether people treat all forms of uncertainty in the same way. Studies investigating known-risk gambles and ambiguous gambles have systematically used the urn context. Little systematic research has investigated differences in expressed attitude as a function of the manner in which vague probability information is communicated to a decision maker. The experiments reported in this paper examine the behavior of people when faced with different situations with and without an insurance context: a risky situation (the probability of loss is known), an uncertain situation (there is no prior information on the probability of loss) or an ambiguous (the information provided is vague).
Perceived risk and insurance decision taking for small losses
Journal of Risk Research, 2019
Little systematic research has investigated differences in expressed attitude as a function of the manner in which probability information is communicated to a decision maker. The purpose of this paper is to investigate differences in expressed attitude when insurance coverage is introduced in a known-risk situation (the probability of loss is known), an uncertain situation (there is no prior information on the probability of loss) or an ambiguous (the information provided is vague). The experiments reported in this paper have been developed and tested in the classroom with undergraduate students. Unlike the vast majority of previous work dealing with lotteries and laboratory gambles, this study examine the behavior of people when facing a purchase decision on a well-known consumer good, i.e. a bottle of wine. The comparative results provide some evidence on the risk-taking behavior of consumers for small losses. Within an insurance context, people prefer the more familiar option of a known-risk situation and contrary to expectations, the results do not provide support to ambiguity aversion but to ambiguity seeking.
Insurance demand under ambiguity and conflict for extreme risks: An experimental analysis
2011
This paper investigates how people behave when confronted with low probability events and ambiguity in an insurance context. It reports the results of an experiment submitted to a large representative sample of the French population that aims at separating attitudes toward risk, imprecision and conflict and at determining if there is a market for ambiguous and extreme event risks. The data show a strong distinction between two decisions: the decision of purchasing insurance or not, and the decision of the willingness to pay for insurance. In the first decision, results reveal that more than 25% of the respondents refuse to buy insurance and that people are more willing to buy insurance in a risky situation than in an ambiguous one. Besides revealing a certain taste for risk, it also highlights a lack of confidence in the insurance markets. In addition, the decision to insure can be explained by certain observable characteristics of the respondents. In the second decision, the results point out that people are willing to pay more under risk than under ambiguity (embracing here imprecision and conflict). Furthermore, respondents accept a higher premium under conflict than under imprecision, which reveals a preference for consensual information. However, it is not possible to find a set of observable characteristics explaining the level of the insurance premium.
2012
This paper investigates how the general public behaves when confronted with low probability events and ambiguity in an insurance context. It reports the results of a questionnaire completed by a large representative sample of the French population that aims at separating attitudes toward risk, imprecision and conict and at determining if there is a demand for ambiguous and extreme event risks. The data show a strong distinction between two aspects of the problem: the decision of purchasing insurance and the willingness to pay. In the decision to insure, more than 25% of the respondents refuse to buy insurance and people are more willing to insure in a risky situation than in an ambiguous one. This certain taste for risk can be explained by the respondents' observable characteristics. In addition, it highlights a lack of condence in the insurance markets. When it comes to willingness to pay, people exhibit ambiguity seeking behaviors. They are willing to pay more under risk than under ambiguity (embracing here imprecision and conict), revealing that people consider ambiguous situations as inferior. Furthermore, respondents behave dierently under imprecision and conict. They exhibit a preference for consensual information and dislike conicts. However, the willingness to pay is poorly correlated with observable characteristics.
The valuation of insurance under uncertainty: does information about probability matter?
The GENEVA Papers on Risk and Insurance- …, 2001
In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensitive to the amount of information available on the probability of a potential loss. In order to test this hypothesis we simulate a market in which we elicit individuals' willingness to pay to insure against a loss characterised either by known or else vague probabilities. We use two distinct treatments by providing subjects with different information over the vague probabilities of loss. In general we find that uncertainty about probabilities has a weak impact on consumers' valuation of insurance. However, additional information about probabilities tends to marginally increase the price individuals are willing to pay to insure themselves. Implications for the insurance market are derived.
Decision making under risk: applications to insurance purchasing
Advances in Consumer Research, 1992
The purpose of this paper is to provide an overview of psychological research on decision making under risk, with an emphasis on insurance behavior. This research approach has supplied many insights into how humans react to risk and uncertainty. These insights may help explain why people buy insurance in some circumstances and not others. For instance, decision research has shown that humans: