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Insurance and portfolio decisions: Two sides of the same coin?

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  • Armantier, Olivier
  • Foncel, Jérôme
  • Treich, Nicolas

Abstract

We study insurance and portfolio decisions, two opposite risk retention tradeoffs. Using household level data, we identify the first joint determinants (e.g. subjective expectations, risk attitude) and frictions (e.g. liquidity constraints, financial literacy) in the literature. We also find key differences between the two decisions. Notably, contrary to economic intuition, risky asset holding and insurance coverage both increase with wealth. We show that this apparent puzzle is driven in part by a specific behavioral pattern (the poor invest too conservatively, while the rich over-insure), and can be explained by two factors: regret avoidance and nonperformance risk.

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  • Armantier, Olivier & Foncel, Jérôme & Treich, Nicolas, 2023. "Insurance and portfolio decisions: Two sides of the same coin?," Journal of Financial Economics, Elsevier, vol. 148(3), pages 201-219.
    • Handle: RePEc:eee:jfinec:v:148:y:2023:i:3:p:201-219
    DOI: 10.1016/j.jfineco.2023.03.003
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    Cited by:

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    3. Bonilla, Claudio A. & Tapia, Pablo & Ruiz, Jose Luis, 2024. "Are annuities an inferior or normal good? Evidence from a less-developed country," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 724-734.

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    More about this item

    Keywords

    Portfolio decisions; Insurance; Wealth;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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