[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/abg/anprac/v26y2022i51516.html
   My bibliography  Save this article

Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics

Author

Listed:
  • Pedro Brandão Graminha
  • Luís Eduardo Afonso
Abstract
Objective: this paper analyzes how framing, anchoring, and certainty effects may affect the behavior of the consumer of auto insurance. Methods: an experiment was carried out, with the face-to-face application of six versions of a questionnaire with 14 questions, for 163 respondents from an educational institution. Questions were prepared to analyze the existence of the framing effect, the anchoring effect, and the certainty effect, in addition to the deductible effect (present in several insurance products). The theoretical framework of the paper is the behavioral economics. Results: younger people, singles, and men are more prone to risk. Although the findings in general corroborate the evidence in the literature, the results of the certainty effect were contrary to expectations. The payment of the deductible increased the respondents’ risk aversion. Conclusions: the existence of biases and heuristics can cause the purchase of insurance to occur in a non-optimal way. Knowledge of the decision-making process is important for insurers and consumers. It is also relevant for regulators, in order to subsidize measures aimed at market efficiency and consumer protection, through the design of an appropriate choice architecture.

Suggested Citation

  • Pedro Brandão Graminha & Luís Eduardo Afonso, 2022. "Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 200421-2004.
    • Handle: RePEc:abg:anprac:v:26:y:2022:i:5:1516
    as

    Download full text from publisher

    File URL: https://rac.anpad.org.br/index.php/rac/article/view/1516
    Download Restriction: no
    File URL: https://rac.anpad.org.br/index.php/rac/article/view/1516/1756
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Nudges: Experimental Evidence on Borrowing and Educational Attainment," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 108-141, May.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Kunreuther,Howard C. & Pauly,Mark V. & McMorrow,Stacey, 2013. "Insurance and Behavioral Economics," Cambridge Books, Cambridge University Press, number 9780521845724, January.
    4. Richard Watt & Francisco Vázquez & Ignacio Moreno, 2001. "An Experiment on Rational Insurance Decisions," Theory and Decision, Springer, vol. 51(2), pages 247-296, December.
    5. Robinson, Peter John & Botzen, W. J. Wouter & Kunreuther, Howard & Chaudhry, Shereen J., 2021. "Default options and insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 39-56.
    6. Xiao Lin, 2020. "Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 351-380, June.
    7. Jochen Ruß & Stefan Schelling, 2018. "Multi Cumulative Prospect Theory and the Demand for Cliquet‐Style Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1103-1125, December.
    8. Wakker, Peter P & Thaler, Richard H & Tversky, Amos, 1997. "Probabilistic Insurance," Journal of Risk and Uncertainty, Springer, vol. 15(1), pages 7-28, October.
    9. Howard Kunreuther & Mark Pauly, 2020. "Do People Have a Bias for Low-Deductible Insurance?," NBER Working Papers 26994, National Bureau of Economic Research, Inc.
    10. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    11. Wakker, Peter P & Thaler, Richard H & Tversky, Amos, 1997. "Probabilistic Insurance," Journal of Risk and Uncertainty, Springer, vol. 15(1), pages 7-28, October.
    12. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    13. Levy, Moshe, 2015. "An evolutionary explanation for risk aversion," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 51-61.
    14. Michelle Baddeley, 2019. "The Unfolding Landscape of Behavioral Economics: from the past to the future," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 3(1), pages 5-11, March.
    15. Lisbet Berg, 2014. "Who benefits from behavioural economics?," Economic Analysis and Policy, Elsevier, vol. 44(2), pages 221-232.
    16. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    17. Jetter, Michael & Walker, Jay K., 2017. "Anchoring in financial decision-making: Evidence from Jeopardy!," Journal of Economic Behavior & Organization, Elsevier, vol. 141(C), pages 164-176.
    18. Kunreuther,Howard C. & Pauly,Mark V. & McMorrow,Stacey, 2013. "Insurance and Behavioral Economics," Cambridge Books, Cambridge University Press, number 9780521608268, January.
    19. Johannes G. Jaspersen & Marc A. Ragin & Justin R. Sydnor, 2019. "Predicting Insurance Demand from Risk Attitudes," NBER Working Papers 26508, National Bureau of Economic Research, Inc.
    20. Andreas Richter & Jörg Schiller & Harris Schlesinger, 2014. "Behavioral insurance: Theory and experiments," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 85-96, April.
    21. Ulrich Schmidt, 2016. "Insurance Demand Under Prospect Theory: A Graphical Analysis," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 77-89, January.
    22. Richard E. Stewart & Barbara D. Stewart, 2001. "The Loss of the Certainty Effect," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 4(2), pages 29-49, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cristiana Cerqueira Leal & Ines Branco-Illodo & Benilde Maria do Nascimento Oliveira & Luisa Esteban-Salvador, 2022. "Nudging and Choice Architecture: Perspectives and Challenges," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 220098-2200.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hwang, In Do, 2024. "Behavioral aspects of household portfolio choice: Effects of loss aversion on life insurance uptake and savings," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1029-1053.
    2. Pitthan, Francisco & De Witte, Kristof, 2021. "Puzzles of insurance demand and its biases: A survey on the role of behavioural biases and financial literacy on insurance demand," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    3. Botzen, W.J.W. & van den Bergh, J.C.J.M., 2012. "Risk attitudes to low-probability climate change risks: WTP for flood insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 151-166.
    4. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
    5. 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.
    6. Johannes G. Jaspersen & Richard Peter & Marc A. Ragin, 2023. "Probability weighting and insurance demand in a unified framework," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 48(1), pages 63-109, March.
    7. Hongli Feng & Xiaodong Du & David A. Hennessy, 2020. "Depressed demand for crop insurance contracts, and a rationale based on third generation Prospect Theory," Agricultural Economics, International Association of Agricultural Economists, vol. 51(1), pages 59-73, January.
    8. Immanuel Lampe & Daniel Würtenberger, 2019. "Loss Aversion And The Demand For Index Insurance," Working Papers on Finance 1907, University of St. Gallen, School of Finance.
    9. Lampe, Immanuel & Würtenberger, Daniel, 2020. "Loss aversion and the demand for index insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 678-693.
    10. Aurélien Baillon & Aleli Kraft & Owen O’Donnell & Kim Wilgenburg, 2022. "A behavioral decomposition of willingness to pay for health insurance," Journal of Risk and Uncertainty, Springer, vol. 64(1), pages 43-87, February.
    11. Floris Heukelom, 2007. "Who are the Behavioral Economists and what do they say?," Tinbergen Institute Discussion Papers 07-020/1, Tinbergen Institute.
    12. Daniel Gottlieb & Olivia S. Mitchell, 2020. "Narrow Framing and Long‐Term Care Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(4), pages 861-893, December.
    13. Andreas Richter & Jochen Ruß & Stefan Schelling, 2019. "Insurance customer behavior: Lessons from behavioral economics," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 183-205, July.
    14. Mankaï, Selim & Marchand, Sébastien & Le, Ngoc Ha, 2024. "Valuing insurance against small probability risks: A meta-analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 109(C).
    15. Daniel Osberghaus, 2017. "Prospect theory, mitigation and adaptation to climate change," Journal of Risk Research, Taylor & Francis Journals, vol. 20(7), pages 909-930, July.
    16. Han Bleichrodt & José-Luis Pinto-Prades, 2004. "The Validity of QALYs Under Non-Expected Utility," Working Papers 113, Barcelona School of Economics.
    17. Ulrich Schmidt, 2016. "Insurance Demand Under Prospect Theory: A Graphical Analysis," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 77-89, January.
    18. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.
    19. Louis Lévy-Garboua, 1999. "Expected Utility and Cognitive Consistency," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03674666, HAL.
    20. Richard E. Stewart & Barbara D. Stewart, 2001. "The Loss of the Certainty Effect," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 4(2), pages 29-49, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:abg:anprac:v:26:y:2022:i:5:1516. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Information Technology of ANPAD (email available below). General contact details of provider: http://anpad.org.br .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.