Preference for Insuring against Probable Small Losses: Insurance Implications

A series of laboratory studies of insurance decision making shows that people buy more insurance against events having a moderately high probability of inflicting a relatively small loss than against low-proba- bility, high-loss events. Two explanations are discussed, both contrary to traditional utility theory. One postulates a utility function convex over losses. The second asserts that people refuse to protect themselves against losses whose probability is below some threshold. This research provides insight into other, often puzzling, facts about people‘s insur- ance behavior. Relevance for public policy is discussed.