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Defusing the risk of borrowing: The psychology of payment protection insurance decisions

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  • Ranyard, Rob
  • McHugh, Sandie

Abstract

Consumers can defuse the financial risks of credit default by taking payment protection insurance (PPI). In two studies, predictions derived from Huber’s risk defusing operator theory of decision making were tested. We investigated the effects on PPI judgements and decisions of previous experience, cognitive appraisal, emotion and changes in PPI cost and level of cover. In Study 1, a randomized groups experiment, 241 high street bank customers were presented with scenarios in which they chose whether or not to purchase PPI. Logistic regression showed that previous experience, the anticipated worry reduction (peace of mind) afforded by PPI, and its perceived value for money, all had direct effects on PPI decisions. In addition, standard regression analysis found that: (1) PPI cost and level of cover significantly predicted the perceived value for money of PPI; and (2) the subjective probability of repayment difficulties predicted anticipated worry about repayment difficulties, which in turn predicted the anticipated worry reduction of PPI. In Study 2, a survey of 300 bank customers, the above direct and indirect effects on PPI decisions were further investigated by path modeling. The final path model was a good fit to the data and confirmed the main relationships described above. Thus, in addition to judgements of the value for money of PPI, worry concerning repayment difficulties, and its anticipated reduction, are strong determinants of consumer credit insurance decisions.

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  • Ranyard, Rob & McHugh, Sandie, 2012. "Defusing the risk of borrowing: The psychology of payment protection insurance decisions," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 738-748.
    • Handle: RePEc:eee:joepsy:v:33:y:2012:i:4:p:738-748
    DOI: 10.1016/j.joep.2012.02.002
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    Cited by:

    1. Lunn, Pete & McGowan, Féidhlim & Howard, Noel, 2018. "Do some financial product features negatively affect consumer decisions? a review of evidence," Research Series, Economic and Social Research Institute (ESRI), number RS78.
    2. Bernard, Carole & Liu, Fangda & Vanduffel, Steven, 2020. "Optimal insurance in the presence of multiple policyholders," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 638-656.
    3. Rob Ranyard & Sandie McHugh, 2012. "Bounded rationality in credit consumers' payment protection insurance decisions: the effect of relative cost and level of cover," Journal of Risk Research, Taylor & Francis Journals, vol. 15(8), pages 937-950, September.
    4. Chen, Zhiping & Yang, Peng, 2020. "Robust optimal reinsurance–investment strategy with price jumps and correlated claims," Insurance: Mathematics and Economics, Elsevier, vol. 92(C), pages 27-46.
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    6. Johannes G. Jaspersen, 2016. "Hypothetical Surveys And Experimental Studies Of Insurance Demand: A Review," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 217-255, January.

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    More about this item

    Keywords

    Consumer credit; Insurance; Decision making; Risk;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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