Survey_HMT_2009

Abstract

The model focuses on two types of individuals: those that regret suboptimal decisions, type R individuals, and those that do not, type N individuals. Let d be the fraction of type R individuals in the population. Both types are endowed with initial wealth w and face a potential loss of size L with initial probability p. Individuals can invest in self-protection at a disutility to reduce the probability of a loss. Type N individuals maximize expected utility with respect to an increasing, concave utility function. For type R individuals, we follow Bell (1982) and Loomes and Sugden (1982) by implementing a two-attribute utility function to incorporate regret in preferences. We consider the following game between insurers and indviduals: Stage 1 - Insurers make binding offers of insurance contracts specifying coverage I and premium rate c. Stage 2 - Individuals choose either a contract from the set of contracts offered or no contract. If the same contract is offered by two insurers, individuals toss a fair coin. Stage 3 - Individuals choose whether or not to invest in self-protoection.