Research Article

Protecting Against Low-Probability Disasters: The Role of Worry

  1. Christian Schade1,*,
  2. Howard Kunreuther2,
  3. Philipp Koellinger3

Article first published online: 26 SEP 2011

DOI: 10.1002/bdm.754

Additional Information

How to Cite

Schade, C., Kunreuther, H. and Koellinger, P. (2011), Protecting Against Low-Probability Disasters: The Role of Worry. J. Behav. Decis. Making. doi: 10.1002/bdm.754

Author Information

  1. 1

    Humboldt-Universitaet zu Berlin, School of Business and Economics, Berlin, Germany

  2. 2

    Wharton School, Risk Management and Decision Processes CenterUniversity of Pennsylvania, Philadelphia, PA,, USA

  3. 3

    Erasmus University, School of Economics, Rotterdam, The Netherlands

*Christian Schade, School of Business and Economics, Humboldt-Universitaet zu Berlin. E-mail: cds@wiwi.hu-berlin.de

Publication History

  1. Article first published online: 26 SEP 2011
  2. Manuscript Accepted: 19 JUL 2011
  3. Manuscript Revised: 13 JUL 2011
  4. Manuscript Received: 20 MAR 2009

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Keywords:

  • low-probability disasters;
  • ambiguity;
  • large stake experiment;
  • worry;
  • protective decisions

ABTRACT

We carry out a large monetary stakes insurance experiment with very small probabilities of losses and ambiguous as well as exact probabilities. Many individuals do not want to pay anything for insurance whether the probabilities are given exactly or are ambiguous. Many others, however, are willing to pay surprisingly large amounts. With ambiguity, the percentage of those paying nothing is smaller and the willingness to pay (WTP) of the other individuals larger than with exact probabilities. Comparing elasticities with ambiguity, we find that worry is much more important than subjective probability in determining WTP for insurance. Furthermore, when the ambiguous loss probability is increased by a factor of 1000, it has almost no effect on WTP. Copyright © 2011 John Wiley & Sons, Ltd.

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