The Effects of Statistical Information on Risk- and Ambiguity-Attitudes, and on Rational Insurance Decisions
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This is a preprint of an article to be published in Management Science
This paper examines the effects of statistical information about risks on risk attitudes and demand for insurance. A descriptive purpose is to obtain new insights into risk and ambiguity attitudes of the general public. A prescriptive purpose is to provide recommendations for the provision of risk information to individuals so as to help them choose their most preferred options. In an experiment, N = 476 clients of a Dutch health insurance company were given various forms of statistical information about health expenses. Average population-cost information generally increased the willingness to take insurance. Own past-costs information differentiated betwee individuals, increasing the willingness to take insurance for high-cost and risk averse clients but not for others. Detailed cost information reinforced the effects of total-cost information. Prescriptively, the drawback of adverse selection must be weighed against a desirable interaction with risk attitude, increased customer satisfaction, and increased cost awareness. Descriptively, ambiguity preference was found rather than aversion, and no risk aversion was found for loss outcomes. Both findings, obtained in a natural decision context, deviate from traditional views in risk theory but agree with prospect theory.
- risk aversion
- prospect theory