Estimating Risk Preferences in the Field

We survey the literature on estimating risk preferences using field data. We concentrate our attention on studies in which risk preferences are the focal object and estimating their structure is the core enterprise. We review a number of models of risk preferences—including both expected utility (EU) theory and non-EU models—that have been estimated using field data, and we highlight issues related to identification and estimation of such models using field data. We then survey the literature, giving separate treatment to research that uses individual-level data (e.g., property insurance data) and research that uses aggregate data (e.g., betting market data). We conclude by discussing directions for future research

The Cost of Legal Restrictions on Experience Rating

We investigate the cost of legal restrictions on experience rating in auto and home insurance. The cost is an opportunity cost as experience rating can mitigate the problems associated with unobserved heterogeneity in claim risk, including mispriced coverage and resulting demand distortions. We assess this cost through a counterfactual analysis in which we explore how risk predictions, premiums, and demand in home insurance and two lines of auto insurance would respond to unrestricted multiline experience rating. Using claims data from a large sample of households, we first estimate the variance-covariance matrix of unobserved heterogeneity in claim risk. We then show that conditioning on claims experience leads to material refinements of predicted claim rates. Lastly, we assess how the households’ demand for coverage would respond to multiline experience rating. We find that the demand response would be large

The Nature of Risk Preferences: Evidence from Insurance Choices

The authors use data on insurance deductible choices to estimate a structural model of risky choice that incorporates standard risk aversion (diminishing marginal utility for wealth) and probability distortions. They find that probability distortions--characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes--play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. They demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting

Distinguishing Probability Weighting from Risk Misperceptions in Field Data

The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data

Static NLO susceptibilities: testing approximation schemes against exact results

The reliability of the approximations commonly adopted in the calculation of static optical (hyper)polarizabilities is tested against exact results obtained for an interesting toy-model. The model accounts for the principal features of typical nonlinear organic materials with mobile electrons strongly coupled to molecular vibrations. The approximations introduced in sum over states and finite field schemes are analyzed in detail. Both the Born-Oppenheimer and the clamped nucleus approximations turn out to be safe for molecules, whereas for donor-acceptor charge transfer complexes deviations from adiabaticity are expected. In the regime of low vibrational frequency, static susceptibilities are strongly dominated by the successive derivatives of the potential energy and large vibrational contributions to hyperpolarizabilities are found. In this regime anharmonic corrections to hyperpolarizabilities are very large, and the harmonic approximation, exact for the linear polarizability, turns out totally inadequate for nonlinear responses. With increasing phonon frequency the role of vibrations smoothly decreases, until, in the antiadiabatic (infinite vibrational frequency) regime, vibrations do not contribute anymore to static susceptibilities, and the purely electronic responses are regained.Comment: 9 pages, including 3 figure