The Role of Loss Aversion in Insurance

Abstract

Abstract This chapter focuses on the loss aversion aspect of prospect theory and its role in the quid pro quo theory of the demand for insurance. It begins by describing the difference between loss aversion and risk aversion, and the empirical studies that have found this difference. Then the theories behind what causes loss aversion are reviewed. The ways in which loss aversion is measured empirically is discussed next. After that, the empirical literature on the impact of loss aversion on the demand for insurance is reviewed, as is the literature on the ways in which the relationship between loss aversion and demand for insurance can be altered. The chapter ends with a summary of the three factors covered so far that are deemed to affect the demand for insurance under the quid pro quo theory.