Decision theories and probabilistic insurance: an experimental test

This paper reports the results of an experiment in which probabilistic insurance, as proposed by Kahneman and Tversky (1979), is compared both with full insurance and no insurance. The experimental results conform to the intuitive prediction that risk-averse agents who are indifferent between full insurance and no insurance, will prefer full insurance to probabilistic insurance and probabilistic insurance to no insurance. The first conclusion is incompatible with the predictions of expected utility theory, and the second with Kahneman and Tversky's prospect theory. We also show that Loomes and Sudgen's regret theory can easily accommodate these intuitive results. Copyright Springer-Verlag Berlin/Heidelberg 2006Probabilistic insurance, prospect theory, regret theory,