THE IMPACT OF SELF-PROTECTION AND SELF-INSURANCE ON INDIVIDUAL-RESPONSE TO RISK

We develop four experimental markets to examine how individuals respond to risk: self-protection and self-insurance in both private and collective auctions. First, we find evidence that the mechanism used to reduce risk is important. Results indicate that the upper and lower bounds on value were elicited by the private self-protection and the collective self-insurance markets, respectively. Second, the robustness of these results declined with low-probability lotteries. We find further evidence that individuals overestimate the impact of low-probability events. Overestimation decreased, however, with repeated market exposure. Third, the four markets induced rapid value formation. Usually only one or two additional market trials were necessary before an individual's perception and valuation of reduced risk stabilized. © 1990 Kluwer Academic Publishers.