Betting on temperature: psychological bias in insurance purchases

Abstract

AbstractWe examine effects of psychological bias on insurance purchases. In 2014, a Chinese insurance company provided high‐temperature insurance, compensating the insured if days with temperature ≥37°C beat the deductible threshold. Although the possibility of a claim is nearly zero and perfectly predicted by the historical temperatures, individual decisions are over‐influenced by the current temperature. A 1 percent increase in hourly temperature is associated with a 3.1 percent increase in hourly sales. The bias is more pronounced with extremely high temperature periods, for young people, and for individuals with a preference for gambling and with easy access to the Internet. We present the importance of psychological bias in understanding individual decisions.