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Health insurance choice and risk preferences under cumulative prospect theory – an experiment

Author

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  • Kairies-Schwarz, Nadja
  • Kokot, Johanna
  • Vomhof, Markus
  • Weßling, Jens

Abstract

We investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences. For this, we use a laboratory experiment with a sequential design. First, subjects face insurance choices. Then, we elicit risk preferences. Allowing for different latent decision making theories, i.e. Cumulative Prospect Theory and Expected Utility Theory, we find that the vast majority are Cumulative Prospect Theory types. Analyzing whether subjects choose contracts consistent with their risk preferences, we find that about 14% of all participants show inconsistent behavior and low decision quality. Yet, the majority shows consistent behavior and good decision quality. Our results suggest that one explanation for inconsistent choices is the application of heuristics.

Suggested Citation

  • Kairies-Schwarz, Nadja & Kokot, Johanna & Vomhof, Markus & Weßling, Jens, 2017. "Health insurance choice and risk preferences under cumulative prospect theory – an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 374-397.
    • Handle: RePEc:eee:jeborg:v:137:y:2017:i:c:p:374-397
    DOI: 10.1016/j.jebo.2017.03.012
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    More about this item

    Keywords

    Health insurance; Risk preferences; Heterogeneity; Laboratory experiment; Cumulative Prospect Theory;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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