Optimism, Overconfidence, and Insurance Decisions

Posted: 7 Feb 2019

See all articles by Vickie L. Bajtelsmit

Vickie L. Bajtelsmit

Colorado State University, Fort Collins

Jennifer C. Coats

Colorado State University, Fort Collins

Date Written: January 25, 2019

Abstract

We report experimental evidence regarding the effects of overconfidence and optimism on insurance decisions. The novel experimental design elicits risk perception information from participants prior to their participation in an incentivized risk management and insurance task. Our design distinguishes between an individual’s optimism bias and overconfidence bias, a contribution that is particularly important for analysis of insurance decisions related to risks outside of the purchaser’s control. Our results show that, after controlling for risk-seeking behavior, optimistic participants incur a higher total cost of risk and are more likely to underinsure than non-optimistic participants, even in cases where the purchase of insurance provides the highest expected payoff. In contrast, we find that overconfidence does not have a significant effect on the decision to purchase insurance.

Keywords: Overconfidence, Insurance demand

JEL Classification: C9; C91; D81

Suggested Citation

Bajtelsmit, Vickie L. and Coats, Jennifer C., Optimism, Overconfidence, and Insurance Decisions (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=3323029

Vickie L. Bajtelsmit (Contact Author)

Colorado State University, Fort Collins ( email )

Fort Collins, CO 80523-1771
United States

Jennifer C. Coats

Colorado State University, Fort Collins ( email )

Fort Collins, CO 80523-1771
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
355
PlumX Metrics