Title: The Effect of Providing Consequence Information on Insurance Choice
Abstract: Individuals frequently make insurance choices that cannot be rationalized by expected utility theory and appear sub-optimal. We propose that these patterns arise in part because people are unable to map the cost-sharing features of plans to their distribution of financial consequences. To address this, we develop and experimentally test a simple decision aid that allows people to view and compare the distribution of financial consequences of plan options. We compare our distribution-based approach to an alternative of providing estimates of the expected value of costs, which is the most common decision-support available in most insurance markets. In two experiments mirroring typical health insurance decisions, we find that when people choose plans using standard feature-based information, they violate state-wise and second-order stochastic dominance at higher rates. Our decision aid substantially reduces dominance violations and choice patterns, and is about twice as effective as displaying expected values. Our finding further suggests that many people cannot map features to financial consequences, which violates a key assumption in models that are based on decision-makers having full information about final wealth states.
About the Series:
The Robert A. Hedges Research Seminar Series is hosted by the Department of Risk, Insurance, and Healthcare Management in the Fox School of Business. The seminar series comprises invited lectures from academics experts around the world who present research in insurance, risk management, and actuarial science.