Homeowners’ Decision Making for Purchasing Insurance Coverage
Homeowners’ Decision Making for Purchasing Insurance Coverage
This chapter explores how homeowners decide when buying insurance coverage, with special emphasis on the amount of insurance (if any) to purchase against losses from a natural disaster. It shows that descriptive aspects of behavior are not taken into account in a normative theory of decision making for purchasing insurance based on expected utility theory. It also reviews empirical evidence on how behavioral and informational factors are likely to affect the purchase of insurance. The chapter demonstrates that there are generally no cost-benefit trade-offs in insurance purchase decisions. The number of presidential disaster declarations has increased considerably since 1965, especially during election years. Aside from financial protection, other factors that influence a homeowner’s decision to purchase of insurance include satisfying mortgage requirements, reduction of anxiety (obtaining peace of mind), and satisfying social norms (for example, purchasing insurance because one’s friends and neighbors have coverage).
Keywords: homeowners, insurance coverage, normative theory, decision making, purchasing, expected utility theory, presidential disaster, natural disaster
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