DECISION-MAKING UNDER RISK - APPLICATIONS TO INSURANCE PURCHASING

The purpose of this paper is to provide an overview of psychological research on decision making under risk, with an emphasis on insurance behavior. This research approach has supplied many insights into how humans react to risk and uncertainty. These insights may help explain why people buy insurance in some circumstances and not others. For instance, decision research has shown that humans: . have limited cognitive capacity to process low probabilities, . focus more on loss probability than the magnitude of loss, . are risk averse for gains but risk seeking for losses, . misperceive randomness of runs -- the "gambler's fallacy," . seek an optimal level of risk, i.e., "risk homeostasis," . show wide individual differences in risky decision making, . are resistant to changing attitudes and beliefs about risks, . exaggerate their decision making ability --overconfidence, . are influenced by subtle shifts in problem wording, and . cannot conceptualize losses they haven't experienced.