Analysing risk preferences among insurance customers : expected utility theory versus disappointment aversion theory

In this thesis we analyse risk preferences among insurance customers using two different theories, namely expected utility theory (EUT) and disappointment aversion theory (DAT). The goal is to find out which of these theories that best can explain the choices the customers made under risk. The analysis is based on a survey submitted to Norwegian insurance customers in the fall of 2011. The respondents were asked to choose between hypothetical income lotteries, and the answers are used to establish an interval of risk aversion for each respondent. We estimate an interval regression model and investigate the relationship between risk aversion and socioeconomic characteristics. We find that risk aversion is significantly negatively correlated with income and number of children, and that those who are married are significantly more risk averse than others. Next, we derive a cardinal measure of risk aversion for each respondent and find significant correlations between this measure and the likelihood of engaging in various risky activities. Assuming constant relative risk aversion, we find that the average coefficient of relative risk aversion is 7.930 under EUT, indicating that our sample is very risk averse. Next, we use simulation to derive the parameters of DAT. As far as we know, this is the first study where hypothetical income gambles of this type are used to estimate parameters of disappointment aversion. We find that the insurance customers appear to have a significant degree of disappointment aversion, and we reject a hypothesis that the customers adhere to the predictions of EUT on average.nhhma