Insurance Choices and Sources of Ambiguity

Uninsurance and underinsurance represent a major policy challenge. A key reason why agents make mistakes might be ascribed to the ambiguity affecting insurance decisions. This paper investigates self-insurance decisions when the probabilities of loss are ambiguous and ambiguity is generated by different sources. We present a model and a set of lab experiments to address two main research questions: are buyers willing to pay more in presence of ambiguity with respect to risk? Is the willingness to pay affected by the source of ambiguity? After measuring subjects’ willingness to pay for insurance when losses are risky, we relate the probability to face losses both to ambiguous events that are context-related (‘external’ sources of ambiguity), and to events that regard the individual ability (‘internal’ sources of ambiguity). We show that subjects’ willingness to pay for insurance depends on the specific source of ambiguity, being lower than willingness to pay in case of risk when the source of ambiguity is internal and decision-makers exhibit overconfidence.