Overconfidence and Demand for Mortgage Insurance

Real Estate Economics, Forthcoming

52 Pages Posted: 25 Nov 2011 Last revised: 2 Mar 2017

See all articles by Ruben Cox

Ruben Cox

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Remco C. J. Zwinkels

VU University Amsterdam - Department of Finance and Financial Sector Management

Date Written: June 3, 2013

Abstract

Homeowners hold a large part of their wealth in real estate and finance it with (recourse) mortgage debt. Mortgage insurance is a means to insure wealth risk that emerges from the liability to repay in case of default. However, it is a well-known fact that individuals are overconfident in the sense that risk tends to be underestimated. We examine the relationship between overconfidence and the demand for mortgage insurance using an extensive survey dataset. We report that demand for insurance decreases by 11 to 13 percent if homeowners are one standard deviation more overconfident. These findings are robust against various alternative explanations such as prior experience with homeownership and the degree of portfolio diversification.

Keywords: mortgage insurance, diversification, overconfidence, household finance, wealth risks

JEL Classification: D14, D18, G21, G22

Suggested Citation

Cox, Ruben and Zwinkels, Remco C.J., Overconfidence and Demand for Mortgage Insurance (June 3, 2013). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1963794 or http://dx.doi.org/10.2139/ssrn.1963794

Ruben Cox (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 (0) 10 4088929 (Phone)

Remco C.J. Zwinkels

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

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