Collaborative Research: Choosing Among Risk Alternatives: An Experimental Investigation of the Impact of Insurance Markets on Decision-Making Biases

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Many studies of individual decision-making have shown that people rely on heuristics that lead to systematic biases. Many economists belief that market forces decrease the prevalence of such biases. This research consists of a series of experiments that add an insurance market to tests of decision-making under uncertainty. We address the question of whether insurance markets create a byproduct - information - that helps people to better understand risk and therefore make better decisions. For example, if a smoker finds out that the price for purchasing life insurance is higher than for a non-smoker, this might convey more easily understood information about the increased risk of smoking than would statistical tables. Our hope is that this research will help increase the understanding of how individuals process and use information from insurance markets, and therefore how information about risks might be presented in a more easily understood manner.