The Influence of Affect on Heuristic Thinking in Insurance Demand

Abstract

Heuristic thinking can influence human behavior in decisions under risk and uncertainty. In an experimental setting, we study whether emotional activation primes individuals to use the representativeness heuristic and the affect heuristic. We observe the decision behavior of 272 subjects in a computerbased experiment that differentiates between incidental affect and integral affect. Positive incidental affect and integral affect increase the use of the representativeness heuristic, while negative incidental affect has no effect. Our findings have statistical and economic significance and carry implications for insurance companies and regulators.

Feeling Is Believing? Evidence From Earthquake Shaking Experience and Insurance Demand

“…First, it expands the literature on how personal experience influences behavior involving financial decisions by looking at a unique type of experience—“feeling,” rather than experience with financial loss (or gain). The definition of “feeling” in this study resembles in spirit the kind of hypothetical loss experience involved in laboratory experiments (Johnson et al, ; Cai and Song, ; Jaspersen and Aseervatham, ), yet there is a clear difference between hypothetical loss experience in an experiment setting and “feeling” of earthquake shaking in real life. The finding of this article suggests that the role of heuristics can be applied to a broader setting, and that “feeling” can be extrapolated to more consequential outcomes.…”

Hypothetical Surveys and Experimental Studies of Insurance Demand: A Review

“…Such models could possibly explain why individuals are often not very risk averse when deciding whether to insure or not, but if they choose to insure, make their choices of deductibles with substantial risk aversion. However, other than the ongoing research on heuristics in insurance choices (Camerer and Kunreuther, 1989;Hsee and Kunreuther, 2000;Papon, 2008;Jaspersen and Aseervatham, forthcoming), we are not aware of any experiments testing such process models in insurance environments.…”

“…If the average willingness to pay is above the theoretically predicted value, it is not necessarily implied that the average individual behaves in contradiction to the theory. If the response pattern is skewed (as in, e.g., Jaspersen and Aseervatham forthcoming), then a few individuals with a very high demand for insurance in violation of the theoretical prediction can produce such a result as well. Second, even if subjects violate a descriptive theory, it is unclear whether they do so because the theory is incorrect or whether they simply make mistakes.…”

“…In the large body of literature on the affect heuristic (Finucane et al., ), it has been shown in numerous studies that if elements of a decision situation lead to affective activation of the decision maker, behavior will change in various ways . Affective activation of the object to insure can, for example, lead to increased insurance demand (Hsee and Kunreuther ) and an increase in heuristic processing when insurance decisions are made (Jaspersen and Aseervatham, forthcoming ).…”

Insurance customer behavior: Lessons from behavioral economics

“…In an experiment, Jaspersen and Aseervatham () show that decision‐makers who were induced positive emotions acquire less insurance cover after loss events. They explain this by the fact that the gambler's fallacy (cf., above) has a greater impact on these individuals.…”