The Impact of Regret on the Demand for Insurance

Abstract

We examine optimal insurance purchase decisions of individuals that exhibit behavior consistent with Regret Theory. Our model incorporates a utility function that assigns a disutility to outcomes that are "ex post" suboptimal, and predicts that individuals with regret-theoretical preferences adjust away from the extremes of full insurance and no insurance coverage. This prediction holds for both coinsurance and deductible contracts, and can explain the frequently observed preferences for low deductibles in markets for personal insurance. Copyright The Journal of Risk and Insurance, 2004.

Evidence that waste aversion begets insurance aversion

“…Now overcompensation and a no claim rebate are equally preferred, which still seems implausible. Braun and Muermann (2004) explain low deductibles by means of regret aversion. This operates similarly to waste aversion, though the psychology is different.…”

How Do Consumers Choose Health Insurance? An Experiment on Heterogeneity in Attribute Tastes and Risk Preferences

“…the lowest treatment costs in case of suffering from all illnesses. This strategy is widely found in the literature and is similar to the priority heuristic (Brandstätter et al, 2006) as well as to the minimax regret theory (Savage, 1954;Braun and Muermann, 2004;Hayashi, 2008). 10 Comparing WTP values with the CE reveals that there is only a small difference for class 5.…”

Optimal Investment Behavior for Regret-Averse Competitive Firms under Price Uncertainty

“…Again, we recall that Paroush and Venezia derived the conditions under which the optimal output in certain framework is higher than that under uncertainty in an equivalent case, although the shortage of the paper is that their results rely on the relative importance of the regret term and the firm's profits. Luckily, with the development of research, more specific and tractable regret-averse functions than that presented by Paroush and Vnezia have been proposed in many works such as in Braun and Muermann (2004), Muermann et al (2006), Mulandzi et al (2008) and so forth. Specifically, using such type of more specific and tractable regret-averse functions, Braun and Muermann (2004) examined optimal insurance purchase decisions of individuals and found that individuals with regret-theoretical preferences adjust away from the extremes of full insurance and no insurance coverage.…”

“…Luckily, with the development of research, more specific and tractable regret-averse functions than that presented by Paroush and Vnezia have been proposed in many works such as in Braun and Muermann (2004), Muermann et al (2006), Mulandzi et al (2008) and so forth. Specifically, using such type of more specific and tractable regret-averse functions, Braun and Muermann (2004) examined optimal insurance purchase decisions of individuals and found that individuals with regret-theoretical preferences adjust away from the extremes of full insurance and no insurance coverage. This prediction not only holds for both coinsurance and deductible contracts, but also can explain the frequently observed preferences for low deductibles in markets for personal insurance.…”