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