INSURANCE FOR LOW-PROBABILITY HAZARDS - A BIMODAL RESPONSE TO UNLIKELY EVENTS

Two insurance experiments using real-money consequences and multiple r ounds to provide experience are described. In the first experiment, su bjects bid for insurance to prevent a fixed loss of $4 at probabilitie s ranging from .01 to .9. Mean bids were near expected value except at the lowest probability of .01, for which a very bimodal distribution was observed (some subjects bid zero and others bid much more than exp ected value). A second experiment explored this bimodality at a probab ility of .01 with loss increased to $40. A similar bimodal distributio n was obtained that persisted over 50 rounds of experience. These labo ratory results are consistent with field evidence for low-probability hazards, for which people appear either to dismiss the risks or to wor ry too much about them.