Department of Industrial Engineering
University of Chile
Institutional Affiliation: University of Chile
NBER Working Papers and Publications
|July 2017||Risk Preferences in Small and Large Stakes: Evidence from Insurance Contract Decisions|
with Benjamin L. Collier, Howard C. Kunreuther, Erwann O. Michel-Kerjan: w23579
We examine risk preferences using the flood insurance decisions of over 100,000 households. In each contract, households make a small stakes decision, the deductible, and a large stakes one, the coverage limit. Over 94 percent of household choose one of the two lowest deductibles out of six options, and 77 percent fully insure, select a coverage limit of at least their home’s replacement cost. Households must be extremely risk averse to explain each of these choices with standard expected utility models. Households’ deductible choices imply a median relative risk aversion of 108. Households’ coverage limit choices require a median relative risk aversion of at least 112. Their substantial risk aversion over large stakes is due to households’ tendency to fully insure despite paying premiums ...