No abstract

Despite the large literature on anomalies in risky choice, very little research has explored the relevance of these insights in real insurance markets. This paper uses new data on consumers' choices of deductibles for home insurance to provide evidence that a surprising level of risk aversion over modest stakes is a reality in the market. Most customers purchase low deductibles despite costs significantly above the expected value. Fitting these choices to a standard model of risk aversion yields implausibly large measures of risk parameters. Potential explanations and the implications of these results for understanding the market for insurance are discussed. (JEL D14, D81, G21, G22)

along with those of various seminar and conference participants. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We examine the health plan choices that 23,894 employees at a U.S. firm made from a large menu of options that differed only in financial cost-sharing and premium. These decisions provide a clear test of the predictions of the standard economic model of insurance choice in the absence of choice frictions because plans were priced so that nearly every plan with a lower deductible was financially dominated by an otherwise identical plan with a high deductible. We document that the majority of employees chose dominated plans, which resulted in excess spending equivalent to 24% of chosen plan premiums. Low-income employees were significantly more likely to choose dominated plans, and most employees did not switch into more financially efficient plans in the subsequent year. We show that the choice of dominated plans cannot be rationalized by standard risk preference or any expectations about health risk. Testing alternative explanations with a series of hypothetical-choice experiments, we find that the popularity of dominated plans was not primarily driven by the size and complexity of the plan menu, nor informed preferences for avoiding high deductibles, but by employees’ lack of understanding of health insurance. Our findings challenge the standard practice of inferring risk preferences from insurance choices and raise doubts about the welfare benefits of health reforms that expand consumer choice.

M any people state a desire to change health-related behaviors, yet struggle to do so. These behavioral problems in domains such as weight loss, smoking, and exercising have helped to motivate a rich literature in economics on time-inconsistent behavior (Strotz 1955(Strotz -1956Laibson 1997; Rabin 1999, 2001;Loewenstein, O'Donoghue, and Rabin 2003;DellaVigna and Malmendier 2006). This literature has shown that time inconsistency can generate patterns of behavior that lead to both "internalities," where one's short-run actions are perceived as suboptimal from one's long-run perspective, and traditional externalities coming through higher group-rated health insurance costs and spending on Medicare and Medicaid (Finkelstein et al. 2009).In the face of these problems, there is increasing interest from firms, insurance companies, policy makers, and health professionals in using financial incentives to motivate changes in health behaviors (Volpp et al. 2009a;Baicker, Cutler, and Song

Risk, Sex differences, Experiments, Testosterone, C9, D81,

The causes and consequences of gender disparities in standardized test scores -- especially in the high tails of achievement -- have been a topic of heated debate. The existing evidence on standardized test scores largely confirms the prevailing stereotypes that more men than women excel in math and science while more women than men excel in tests of language and reading. We provide a new perspective on this gender gap in test scores by analyzing the variation in these disparities across geographic areas. We illustrate that male-female ratios of students scoring in the high ranges of standardized tests vary significantly across the United States. This variation is systematic in several important ways. In particular, states where males are highly overrepresented in the top math and science scores also tend to be states where women are highly overrepresented in the top reading scores. This pattern suggests that states vary in their adherence to stereotypical gender performance, rather than favoring one sex over the other across all subjects. Furthermore, since the genetic distinction and the hormonal differences between sexes that might affect early cognitive development (that is, innate abilities) are likely the same regardless of the state in which a person happens to be born, the variation we find speaks to the nature-versus-nurture debates surrounding test scores and suggests environments significantly impact gender disparities in test scores.

Can heuristic information processing affect important product markets? Analyzing over 22 million wholesale used-car transactions, we find evidence of left-digit bias in the processing of odometer values, whereby individuals focus on the number's leftmost digits. The bias leads to discontinuous drops in sale prices at 10,000-mile odometer thresholds, along with smaller drops at 1,000-mile thresholds. These findings reveal that information-processing heuristics matter even in markets with large stakes and easily observed information. We model left-digit bias in an inattention framework and structurally estimate the inattention parameter. Empirical patterns suggest the results are driven by final customers rather than professional agents. (JEL D12, D44, D83, L81)