DTIC ADA147789: Risk, Ambiguity, and Insurance pdf

DTIC ADA147789: Risk, Ambiguity, and Insurance

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The analysis of insurance decision making has traditionally been based on the expected utility model. However, whereas this model ignores the precision with which probabilities can be estimated, there is considerable evidence that uncertainty about uncertainties does affect choice behavior. This paper examines the effects of such ambiguity on insurance decision making by both firms and consumers. After providing examples of the possible effects of ambiguity on the market for insurance, insurance decision making is analyzed theoretically with the aid of the ambiguity model developed by Einhorn and Hogarth (1984). The implications of this model are then tested in a series of four experiments using economically sophisticated subjects. The experimental results accord closely with the theoretical predictions, e.g.: firm’s minimum selling prices are more sensitive to ambiguity than consumers’ maximum buying prices; for firms, the most profitable market segment per dollar coverage occurs for small probability of loss events where consumers are ambiguous but firms are not; conditions exist where people seek rather than avoid ambiguity

• Creator/s: Defense Technical Information Center
• Date: 10/1/1984
• Year: 1984
• Book Topics/Themes: DTIC Archive, Hogarth, R M, CHICAGO UNIV IL CENTER FOR DECISION RESEARCH, *PROBABILITY, *INSURANCE, MATHEMATICAL MODELS, MARKETING, DECISION MAKING, PREDICTIONS, AMBIGUITY

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