(Over)Insuring Modest Risks
American Economic Journal: Applied
Despite the large literature on anomalies in risky choice, very little research has ex-
plored the relevance of these insights in real insurance markets. This paper uses new
data on consumers choices of deductibles for home insurance to provide evidence that
a surprising level of risk aversion over modest stakes is a reality in the market. Most
customers purchase low deductibles despite costs signi
cantly above the expected value.
Fitting these choices to a standard model of risk aversion yields implausibly large mea-
sures of risk parameters. Potential explanations and the implications of these results for
understanding the market for insurance are discussed.