Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics
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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.
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Graminha, P. B., & Afonso, L. E. (2021). Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics. Journal of Contemporary Administration, 26(5), e200421. https://doi.org/10.1590/1982-7849rac2022200421.en
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Brown, J. R., Kling, J. R., Mullainathan, S., & Wrobel, M. V. (2008). Why don’t people insure late-life consumption? A framing explanation of the under-annuitization puzzle. American Economic Review, 98(2), 304–309. https://doi.org/10.1257/aer.98.2.304
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Cohen, A., & Einav, L. (2007). Estimating risk preferences from deductible choice. American Economic Review, 97(3), 745–788. https://doi.org/10.1257/aer.97.3.745
Cohen, A., & Siegelman, P. (2010). Testing for adverse selection in insurance markets. Journal of Risk and Insurance, 77(1), 39–84. https://doi.org/10.1111/j.1539-6975.2009.01337.x
Collier, B., Schwartz, D., Kunreuther, H. C., & Michel-Kerjan, E. O. (2017). Risk preferences in small and large stakes: Evidence from insurance contract decisions [Working Paper 23579]. National Bureau of Economic Research, Cambridge, MA. https://doi.org/10.3386/w23579
Corcos, A., Montmarquette, C., & Pannequin, F. (2020). How the demand for insurance became behavioral. Journal of Economic Behavior & Organization, 180, 590–595. https://doi.org/10.1016/j.jebo.2020.09.001
Cruz, G. S. Z. (2017). Tomada de decisão em seguros: Os efeitos do contexto e da franquia dedutível para os tomadores de seguro auto (Undergraduate dissertation). Universidade de São Paulo, FEA, São Paulo, SP, Brazil.
Czibor, E., Jimenez-Gomez, D., & List, J. A. (2019). The dozen things experimental economists should do (More of) [Working Paper 25451]. National Bureau of Economic Research, Cambridge, MA. https://doi.org/10.3386/w25451
Dhami, S. (2016). The foundations of behavioral economic analysis. Oxford: Oxford University Press.
Dudley, S. E., & Xie, Z. (2020). Designing a choice architecture for regulators. Public Administration Review, 80(1), 151–156. https://doi.org/10.1111/puar.13112
Eisenhauer, J. G., & Ventura, L. (2003). Survey measures of risk aversion and prudence. Applied Economics, 35(13), 1477–1484. https://doi.org/10.1080/0003684032000151287
Gottlieb, D., & Mitchell, O. S. (2020). Narrow framing and long‐term care insurance. Journal of Risk and Insurance, 87(4), 861-893. https://doi.org/10.1111/jori.12290
Hansen, J. V., Jacobsen, R. H., & Lau, M. I. (2016). Willingness to pay for insurance in Denmark. Journal of Risk and Insurance, 83(1), 49–76. https://doi.org/10.1111/j.1539-6975.2013.12011.x
Harrison, G. W., & Ng, J. M. (2019). Behavioral insurance and economic theory: A literature review. Risk Management and Insurance Review, 22(2), 133–182. https://doi.org/10.1111/rmir.12119
Harrison, G. W., & Richter, A. (2016). Introduction: Symposium on the methodologies of behavioral insurance. Journal of Risk and Insurance, 83(1), 43–47. https://doi.org/10.1111/jori.12144
Hoffmann, R., Cam, M.-A., & Camilleri, A. R. (2019). Deciding to invest responsibly: Choice architecture and demographics in an incentivised retirement savings experiment. Journal of Behavioral and Experimental Economics, 80, 219–230. https://doi.org/10.1016/j.socec.2019.04.005
Irandoust, M. (2017). Factors associated with financial risk tolerance based on proportional odds model: Evidence from Sweden. Journal of Financial Counseling and Planning, 28(1), 155–164. https://doi.org/10.1891/1052-3073.28.1.155
Jaspersen, J. G. (2016). Hypothetical surveys and experimental studies of insurance demand: A review. Journal of Risk and Insurance, 83(1), 217–255. https://doi.org/10.1111/jori.12100
Jaspersen, J. G., & Aseervatham, V. (2017). The influence of affect on heuristic thinking in insurance demand. Journal of Risk and Insurance, 84(1), 239–266. https://doi.org/10.1111/jori.12088
Jaspersen, J. G., Ragin, M. A., & Sydnor, J. R. (2019). Predicting insurance demand from risk attitudes [Working Paper 26508]. National Bureau of Economic Research, Cambridge, MA. https://doi.org/10.3386/w26508
Jetter, M., & Walker, J. K. (2017). Anchoring in financial decision-making: Evidence from Jeopardy! Journal of Economic Behavior & Organization, 141, 164–176. https://doi.org/10.1016/j.jebo.2017.07.006
Jianakoplos, N. A., & Bernasek, A. (2006). Financial risk taking by age and birth cohort. Southern Economic Journal, 72(4), 981-1001. https://doi.org/10.2307/20111864
Johnson, E. J., Hershey, J., Meszaros, J., & Kunreuther, H. (1993). Framing, probability distortions, and insurance decisions. Journal of Risk and Uncertainty, 7(1), 35–51. https://doi.org/10.1007/BF01065313
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–292. https://doi.org/10.2307/1914185
Kirchler, E., & Hoelzl, E. (2017). Economic psychology: An introduction. Cambridge: Cambridge University Press. https://doi.org/10.1017/9781139629065
Kremer, M., Rao, G., & Schilbach, F. (2019). Behavioral development economics. In B. D. Bernheim, S. DellaVigna, & D. Laibson (Eds.), Handbook of behavioral economics - applications and foundations 1 (Vol. 2, Chap. 5, pp. 345–458). Amsterdam: Elsevier. https://doi.org/10.1016/bs.hesbe.2018.12.002
Kunreuther, H. C., Pauly, M. V., & McMorrow, S. (2013). Insurance & behavioral economics: Improving decisions in the most misunderstood industry. Cambridge: Cambridge University Press.
Kunreuther, H., & Pauly, M. (2020). Do people have a bias for low-deductible insurance? [Working Paper 26994]. National Bureau of Economic Research, Cambridge, MA. https://doi.org/10.3386/w26994
Ledo, B. C. A., & Lopes, C. M. A. (2019). Estimating risk and risk aversion in the automobile insurance market. Brazilian Review of Econometrics, 39(1), 85–112. https://doi.org/10.12660/bre.v39n12019.73975
Levy, M. (2015). An evolutionary explanation for risk aversion. Journal of Economic Psychology, 46, 51–61. https://doi.org/10.1016/j.joep.2014.12.001
Lin, X. (2020). Feeling is believing? Evidence from earthquake shaking experience and insurance demand. Journal of Risk and Insurance, 87(2), 351–380. https://doi.org/10.1111/jori.12291
Marx, B. M., & Turner, L. J. (2019). Student loan nudges: Experimental evidence on borrowing and educational attainment. American Economic Journal: Economic Policy, 11(2), 108–141. https://doi.org/10.1257/pol.20180279
Mol, J. M., Botzen, W. J. W., & Blasch, J. E. (2020). Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives. Journal of Behavioral and Experimental Economics, 84, 101500. https://doi.org/10.1016/j.socec.2019.101500
Mossin, J. (1968). Aspects of rational insurance purchasing. Journal of Political Economy, 76(4, Part 1), 553–568. https://doi.org/10.1086/259427
Muramatsu, R. (2020). Microfinanças e comportamento financeiro dos pobres: Algumas contribuições da economia comportamental. Brazilian Journal of Development, 6(5), 27275–27294. https://doi.org/10.34117/bjdv6n5-251
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