Rationality and honesty of consumers in insurance decisions

Abstract

In this paper we design an experimental study to test two conventional theoretical assumptions regarding insurance consumer decision making under uncertainty: the purchase of insurance with premiums that guarantee an increase in expected utility, and the preference for a greater level of coverage given a greater level of risk (a larger expected loss) at constant premiums. We find that the first assumption is fully supported by our experimental study, but we do not find any evidence to support the theoretical relationship between coverage and expected loss. The experimental study also allowed us to check the honesty of consumers with insurance contracts. The results point to a persistence of honest behaviour that cannot be explained by criteria of pure economic rationality. The explication for such behaviour must reside in the role other issues like traditions, accepted behavioral customs, ethics and even gender, which therefore must also be important for decision making under uncertainty.