Willingness to Pay for Reductions in Morbidity Risks Under Anticipated Regret

Abstract

Prevention decisions that reduce individuals’ morbidity risks are important, generally irreversible, and particularly difficult since they imply a trade-off between two important attributes: the safety and its cost. All those features make regret more likely to be anticipated. In this paper, we study the willingness to pay for reductions in morbidity risks within a framework of anticipated regret. As results, we find that with other things being equal, an individual who is disproportionately averse to large regrets has a higher willingness to pay than a standard expected utility individual. This notion of regret aversion has been shown to be relevant for regret theory to reconcile with many decision patterns which are not in line with standard expected utility theory. Moreover, the effect induced by this notion of regret aversion can be interpreted as if the regret averse individual overweighs risk reductions due to prevention, i.e., probability weighting effect. We further discuss how the resolution of uncertainty may affect the regret averse individual’s willingness to pay, and how the attribution effect in belief formation may bias its estimates.