Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry

Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry

By Howard C Kunreuther, Mark V Pauly, and Stacey McMorrow

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This book examines the behavior of individuals at risk and insurance industry policy makers involved in selling, buying and regulation.

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Book Information

Publisher: Cambridge University Press
Publish Date: 01/28/2013
Pages: 338
ISBN-13: 9780521608268
ISBN-10: 0521608260
Language: English

Full Description

Insurance is an extraordinarily useful tool to manage risk. When it works as intended, it provides financial protection to individuals and a profitable business model for insurance firms and their investors. But it is broadly misunderstood by consumers, regulators, and insurance executives. This book looks at the behavior of individuals at risk, insurance industry decision makers, and policy makers at the local, state, and federal level involved in the selling, buying, and regulating of insurance. It compares their actions to those predicted by benchmark models of choice derived from classical economic theory. When actual choices stray from predictions, the behavior is considered to be anomalous. With considerable sums of money at stake, both in consumer premiums and insurance company payouts, it is important to understand the reasons for anomalous behavior. Howard Kunreuther, Mark Pauly, and Stacey McMorrow examine these anomalies through the lens of behavioral economics, which takes into account emotions, biases, and simplified decision rules. The authors then consider if and how such behavioral anomalies could be modified to improve individual and social welfare. This book is neither a defense of the insurance industry nor an attack on it. Neither is it a consumer guide to purchasing insurance, although the authors believe that consumers will benefit from the insights it contains. Rather, this book describes situations in which both public policy and the insurance industry's collective posture need to change. This may require incentives, rules, and institutions to help reduce both inefficient and anomalous behavior, thereby encouraging behavior that will improve individual and social welfare.

About the Authors

Howard Kunreuther is the James G. Dinan Professor of Decision Sciences and Business and Public Policy at the Wharton School, University of Pennsylvania and co-director of the Wharton Risk Management and Decision Processes Center. He has a long-standing interest in ways that society can better manage low-probability, high-consequence events.

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Howard Kunreuther is the James G. Dinan Professor of Decision Sciences and Business and Public Policy at the Wharton School, University of Pennsylvania and co-director of the Wharton Risk Management and Decision Processes Center. He has a long-standing interest in ways that society can better manage low-probability, high-consequence events.

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Stacey McMorrow is a research associate in the Health Policy Center at the Urban Institute, Washington, DC. She is currently leading a study of the effects of increased federal funding for community health centers on access to care for low-income individuals and has analyzed the potential impacts of the Affordable Care Act on small employers, individuals and families.

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