(Over)Insuring Modest Risks

(Over)Insuring Modest Risks


  • Justin Sydnor


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 consumersÂ’ 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 signiÂ…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.