The behavioral welfare economics of insurance

Abstract

Behavioral economics poses a challenge for the welfare evaluation of insurance products and policy. It demands that we recognize that the descriptive account of behavior toward insurance depends on risk and time preferences that might not be the ones we were all taught, and still teach, and that subjective beliefs might not accord with actuarial assessments of loss probabilities. Challenging as that can be, things become even harder when we jettison naive notions of revealed preferences as the basis for evaluating the individual welfare of insurance decisions. These challenges demand theory, datasets that allow us to identify structural models, datasets that allow us to observe those that do not purchase insurance, appropriate econometric methods, and particularly pay close attention to the methodological nonsense that is often used to justify policy interventions.