Behavioral Insurance and Economic Theory: A Literature Review

Abstract

Decisions to purchase insurance should be a perfect place to see economic theory at work in general, and behavioral economics at work in particular. We have well‐developed theories of the demand for, and welfare evaluation of, insurance products. These theories extend relatively easily to the insights of behavioral economics. Unfortunately, the empirical literature has not maintained this tight connection. In fact, much of the empirical literature illustrates the dangers of the modern passion with agnostic economics: avoiding theory at all costs to focus on “what works.” We identify these dangers and the implications in the literature.