Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up

Cai, Jing and Song, Changcheng (2013): Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up.

Abstract

This paper uses a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, we conduct a set of insurance games with a random subset of farmers. Our findings show that playing insurance games improves insurance take-up in real life by 48%. Exploring the mechanism behind this effect, we show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance game. Moreover, we find that, compared with experience with real disasters in the previous year, the hypothetical experience gained in the insurance game has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.

• Item Type: MPRA Paper
• Language: English
• Keywords: Insurance, Take-up, Game, Experience, Learning
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q12 - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

References

Ashraf, Nava, Dean Karlan, and Wesley Yin, “Tying Odysseus to the Mast: Evi- dence from a Commitment Savings Product in the Philippines,” The Quarterly Journal of Economics, May 2006, 121 (2), 635–672.

Cai, Jing, “Social Networks and the Decision to Insure: Evidence from Randomized Experiments in China,” Working Paper, 2012.

Cole, Shawn, Petia Topalova, , Xavier Gene, Jeremy Tobacman, Robert Townsend, and James Vickery, “Barriers to Household Risk Management: Evidence from India,” Americal Economic Journal: Applied Economics, 2013, 5 (1), 104–35.

Einav, Liran, Amy Finkelstein, and Jonathan Levin, “Beyond Testing: Empirical Models of Insurance Markets,” Annual Review of Economics, 09 2010, 2 (1), 311–336.

Fehr, Ernst and Lorenz Goette, “Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment,” American Economic Review, March 2007, 97 (1), 298–317.

Fredrickson, B.L. and D. Kahneman, “Duration neglect in retrospective evaluations of affective episodes,” Journal of Personality and Social Psychology, 1993, 65, 45–55.

Gaurav, Sarthak, Shawn Cole, and Jeremy Tobacman, “The Randomized Evaluation of Financial Literacy on Rainfall Insurance Take-up in Gujarat,” ILO Microinsurance Innovation Facility Research Paper, 2011, (1).

Gazzale, Robert S., Julian Jamison, Alexander Karlan, and Dean S. Karlan, “Ambiguous Solicitation: Ambiguous Prescription,” Department of Economics Working Papers 2009-02, Department of Economics, Williams College March 2009.

Giné, Xavier, Robert Townsend, and James Vickery, “Patterns of Rainfall Insurance Participation in Rural India,” World Bank Economic Review, October 2008, 22 (3), 539– 566.

Haselhuhn, Michael P., Devin G. Pope, and Maurice E. Schweitzer, “Size Matters (and so Does Experience): How Personal Experience with a Fine Influences Behavior,” Working Paper, 2009.

Hertwig, Ralph, Greg Barron, Elke U. Weber, and Ido Erev, “Decisions From Experience and the Effect of Rare Events in Risky Choice,” Psychological Science, 2004, 15 (8).

Holt, Charles A., “Games, and Strategic Behavior: Recipes for Interactive Learning,” Unpublished Manuscript, 2005.

Karlan, Dean, Robert Darko Osei, Isaac Osei-Akoto, and Christopher Udry, “Agricultural Decisions after Relaxing Credit and Risk Constraints,” NBER Working Paper, 2012, (18463).

Kaustia, Markku and Samuli Knüpfer, “Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions,” Journal of Finance, 2008, 63 (6).

Levitt, Steven D. and John A. List, “What Do Laboratory Experiments Tell Us About the Real World?,” Journal of Economic Perspectives, 2007, 21 (2), 153–174.

Malmendier, Ulrike and Stefan Nagel, “Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?,” The Quarterly Journal of Economics, 2011, 126 (1), 373–416.

Plott, Charles R., Public Economics, Political Processes and Policy Applications, Vol.1, Cheltenham, UK: Edward Elgar Publishing, 2001.

Schreiber, C. A. and D. Kahneman, “Determinants of the remembered utility of aversive sounds,” Journal of Experimental Psychology: General, 2000, 129, 27–42.

Simonsohn, Uri, Niklas Karlsson, George Loewenstein, and Dan Ariely, “The tree of experience in the forest of information: Overweighing experienced relative to observed information,” Games and Economic Behavior, 2008, 62, 263–286.