Is insurance normal or inferior? -A regret theoretical approach-

Yoichiro Fujii, Mahito Okura, Yusuke Osaki*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study considers how changes in wealth affect insurance demand when individuals suffer disutility from regret. Anticipated regret stems from a comparison between the ex-post maximum and actual wealth. We consider a situation wherein individuals maximize their expected utility incorporating anticipated regret. The wealth effect on insurance demand can be classified into the risk and the regret effects. These effects are determined by the properties of the utility function and the regret function. We show that insurance can be normal when individuals place weight on anticipated regret, even though the utility function exhibit decreasing absolute risk aversion. This result indicates that regret theory is a possible explanation to the wealth effect puzzle, in which insurance is normal from empirical observation, but it should be inferior by theoretical prediction under expected utility theory.

Original languageEnglish
Article number101559
JournalNorth American Journal of Economics and Finance
Volume58
DOIs
Publication statusPublished - 2021 Nov

Keywords

  • Decreasing absolute risk aversion
  • Demand shift
  • Regret sensitivity
  • Wealth effect puzzle

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Is insurance normal or inferior? -A regret theoretical approach-'. Together they form a unique fingerprint.

Cite this