Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [67]
POSTSCRIPT: CAN LEARNING BE IMPROVED?
This brings us to a final, natural, question: Can the above-described limits to effective learning be overcome? The answer is twofold. On the one hand, following the adage that knowledge of the cause is half the cure, the fact that we know something about the factors that impede learning presents opportunities for improving decisions through improved communication and incentive programs. To illustrate, the above discussion suggests that it is important not just to instruct residents as to what investments they should make in mitigation but also to accompany these instructions with education designed to equip them with accurate mental models of why these investments are necessary for safety. Whereas a resident who sees storms shutters simply as a way of protecting glass might be tempted to postpone the investment, one who sees them as essential to ensuring that the home’s roof stays intact might feel a greater sense of urgency. Likewise, knowledge of the fact that long time intervals between disasters tends to extinguish instincts to invest in mitigation suggests the need for policies that encourage the persistence of long-term investments, such as imbedding investments in a home’s mortgage plan.
On the other hand, the above discussion also suggests that improvements in education and the provision of incentives may be offset by factors that impede mitigation and are harder to overcome. The better able we are to predict natural hazards (such as with improved hurricane forecasting) and the more informed we are about how to mitigate against them, the less lethal they are likely to seem—and, hence, the lower our reluctance will be to take actions that put us in harm’s way. In the 1800s, residents of Indianola, Texas, lacked warning advice by the National Hurricane Center, lacked building codes, and lacked an agency like FEMA to help with recovery after a storm. But they had one thing that modern coastal residents in the Bolivar Peninsula to the north lack: a fearful respect for Nature that caused them to move to where they did not have the need to mitigate.
RECOMMENDED READING
Meyer, Robert (2006). “Why We Under-Prepare for Hazards.” In Ronald J. Daniels, Donald F. Kettl, and Howard Kunreuther, eds. On Risk and Disaster: Lessons from Hurricane Katrina. Philadelphia: University of Pennsylvania Press.
16
Dumb Decisions or as Smart as the Average Politician?
Economic and Behavioral Explanations for Insurance Demand
MARK V. PAULY
INTRODUCTION
Insurance is one of mankind’s greatest inventions. I used to rank it just a little behind fractional reserve banking—a modern banking practice in which banks keep only a fraction of their deposits in reserve and lend out the remainder—which by its nature expands money supply beyond what it would otherwise be. But the recent turmoil in capital markets (with insurance not totally unaffected) suggests that the two financial instruments may now be even.
Several of the previous chapters in this book have already referred to insurance decisions as illustrative examples of a much broader set of decisions under risk, uncertainty, and even ambiguity. Here I would like to specifically discuss decision-making processes underlying the decision to purchase insurance coverage or not. And while most consumers buy some insurance and some investors make (or lose) fortunes at it, consumer behavior often fails to fit the usual models of expected utility maximization (see the description by Paul Schoemaker in his chapter). Faced with this phenomenon, Howard Kunreuther and I have collaborated over the years on research that tries to identify explanations for what happens as well as to suggest normative public policy strategies intended to evaluate and potentially modify consumer and insurer behavior. Our work largely deals with the broad question