Neglecting Disaster: Why Don't People Insure Against Large Losses?

This paper provides a theoretical explanation for the common observation that people often fail to purchase insurance against low-probability high-loss events even when it is offered at favorable premiums. We hypothesize that individuals maximize expected utility but face an explicit or implicit cost to discovering the true probability of rare events. This cost constitutes a threshold that may inhibit purchase but may be offset in several ways by suppliers of insurers and state regulators.     

Developing Models for Day Services

This paper reports an evaluation of a rural activity project for people with learning difficulties. The project is situated in (but not a regular part of) an agriculture college. Both statutory and voluntary interests are represented in the management of the scheme, which is funded by the All Wales Strategy for the Mentally Handicapped through the local authority. Despite the widespread presence of ideas about normalization and carer participation, key stakeholders in the project appeared to draw on various aspects of three different models in describing, assessing and participating in the work of the scheme: a training for work model, a personal and social growth model, and an education for life model. We explore the question of whether such contrasting views can be tolerated in a single project, and their implications for policy and practice decisions. Each model has its distinctive consequences for project aims, selection, programme planning, staffing requirements, future development objectives and desirable project outcomes. The debate has implications for the way in which policies of normalization are operationalized in and beyond the field of learning difficulties.     

Risk,ambiguity, and insurance

In a series of experiments, economically sophisticated subjects, including professional actuaries, priced insurance both as consumers and as firms under conditions of ambiguity. Findings support implications of the Einhorn-Hogarth ambiguity model: (1) For low probability-of-loss events, prices of both consumers and firms indicated aversion to ambiguity; (2) As probabilities of losses increased, aversion to ambiguity decreased, with consumers exhibiting ambiguity preference for high probability-of-loss events; and (3) Firms showed greater aversion to ambiguity than consumers. The results are shown to be incompatible with traditional economic analysis of insurance markets and are discussed with respect to the effects of ambiguity on the supply and demand for insurance.University of Chicago Graduate School of BusinessUniversity of Pennsylvania The Wharton School     

Explaining third-party success in gubernatorial elections: The cases of Alaska, Connecticut, Maine and Minnesota

In the 1990s alone, four states elected third-party governors. Walter Hickel of Alaska and Lowell Weicker of Connecticut were elected in 1990. Maine elected Angus King in 1994. And Jesse Ventura was elected governor of Minnesota in 1998. In this article, I examine these four cases in an attempt to identify the factors that contribute to third-party electoral success. I apply two models to these cases. The first model, “alternative culture,” holds that certain voters—regardless of specific context—are predisposed to support alternative candidates. The second model, “institutional context,” looks at factors such as name recognition, resources, and access to media as explanations of third-party success. I find that except for the influence of “partisan independence,” there is little evidence to support the persistence of an alternative culture of third-party voting. Rather, these four cases are linked by a context particularly favorable to these alternative candidates.     

Framing,probability distortions,and insurance decisions

A series of studies examines whether certain biases in probability assessments and perceptions of loss, previously found in experimental studies, affect consumers' decisions about insurance. Framing manipulations lead the consumers studied here to make hypothetical insurance-purchase choices that violate basic laws of probability and value. Subjects exhibit distortions in their perception of risk and framing effects in evaluating premiums and benefits. Illustrations from insurance markets suggest that the same effects occur when consumers make actual insurance purchases.Presented at the Conference onMaking Decisions about Liability and Insurance, The Wharton School, University of Pennsylvania, Philadelphia, PA, 6–7 December, 1991. This research is supported by National Science Foundation Grant SES88-09299. The authors thank Jon Baron, Colin Camerer, Neil Doherty, Paul Kleindorfer, Amos Tversky, and two anonymous referees for many helpful comments. We particularly acknowledge the efforts of Matthew Robinson and Penny Pollister for their help with data analysis.     

On Robust and Efficient Estimation of the Center of Symmetry

In this article, a class of estimators of the center of symmetry based on the empirical characteristic function is examined. In the spirit of the Hodges–Lehmann estimator, the resulting procedures are shown to be a function of the pairwise averages. The proposed procedures are also shown to have an equivalent representation as the minimizers of certain distances between two corresponding kernel density estimators. An alternative characterization of the Hodges–Lehmann estimator is established upon the use of a particularly simple choice of kernel.     

Confidence intervals for n in the exponential order statistics problem

A simplified proof of the basic properties of the estimators in the Exponential Order Statistics (Jelinski-Moranda) Model is given. The method of constructing confidence intervals from hypothesis tests is applied to find conservative confidence intervals for the unknown parameters in the model.