Risk related question?
what economic factor might be associated with a reluctance to purchase insurance against automatic disasters and other rare events?
and why should a risk averse individual spend more to insure against a soaring value/low probabiliy loss than against a low value/high probabiliy loss of the same expected efficacy? how can i capture this contained by a diagram??
Thanks alot!!!
Answers:
Sounds approaching you're a university economics student :P.
You need to google expressions like "economics risk aversion insurance" and "von neumann-morgernstern expected utility" or read the relevant chapter in the textbook you should have bought! Can probably find exact graph you call for online. It's not so easy when you're asked to draw one within an exam - you need to read between the lines the mechanisms underpinning the cross-examine so you can draw accurately (rather than regurgitate one of several memorised graphs).
People make decision according to the expected utility of their outcomes, not the expected values. For instance, if you have $50, and someone say, "Let's toss a coin. If it's heads you draw from $100. If it's tails, you lose everything." A risk-neutral soul, who treats expected utility and expected value as equivalent, would be equally glowing with rejecting or accepting the hold out of a gamble: the lay a wager gives a 50% destiny of 0 and a 50% chance of $100 (the expected helpfulness is in the middle in attendance, between 0 and 100, i.e. $50). Mathematically, the expected value = (0.5 x 0) + (0.5 x 100). A risk-averse character would rather stick beside the $50 (if he was tremendously averse to risk, he'd attach a lot smaller number utility to *money got via eternal risk* and he may even prefer to stick with $50 than toss a coin over $0 and $750). A risk-lover would fairly go for the back for $100. In fact, if the risk-lover loved risk _enough_ (i.e. give the potential winnings a huge amount of expected utility by virtue of their mortal the result of risk), he would even prefer to gamble contained by the following situation. "Stick with $50 or toss a coin, head gets you $40 [only forty] and tail you lose everything." Gambling increases risk, and the risk-lover loves this and prefers to take the have a flutter. (People, to reiterate, make decision based on the expected utility of outcomes not expected values (though these would be correlated) - and here the extreme risk-lover attaches abundantly of utility to $40 got from a stake; even though it's less than he would enjoy just settling beside the $50 he has already.) You can see how having a bet increases the risk a person endure - and insurance decreases it.
With your second insurance press, you have impossible to tell apart expected values of loss but not expected utilities.
I give a intertwine to a website which shows you how economists graph risk-aversion. You have a reliable amount, z1, and another z2, with the lottery human being the chance of getting z1 or z2. Your risk-averse agent will be indifferent between a low sum of money for clear in your mind and a quite illustrious sum got via risk. The graph YOU draw would enjoy a straight line, which clearly shows that the expected values of scenario one and two (high/low value) are equivalent but the expected utilities (or more correctly disutilities since we're talking in the region of losses here) are different - your actor is especially depressed when considering a high value/low prob loss but not as depressed when considering a low value/high prob loss. Have you hear of "the law of diminishing returns"? One example is the statute of diminishing marginal utility. The first curve you see in the website graph is an example of that - the curve is utility, and it decrease as you get richer (e.g. the elation you get from moving from mortal broke to being worth $1m is a great deal; the extra happiness get from moving from $1m to $2m is not nearly as high). Your question would be more to do beside diminishing disutility with lower helpfulness losses. You have tons of disutility near high attraction losses (say your house); but less next to lower values (say your bicycle).
This second Q. does seem not easy to answer scientifically. I'd insure the same opening - I'd insure against something low-risk but catastrophic but not something high-risk but bearable. It's because my expected disutility from the former would be huge, despite the fact the expected loss values are equal.
Interesting part from website which may provide answer:
"Of course, as Milton Friedman and Leonard J. Savage(1948) indicated, it is not necessarily true that an individual's utility function have the same manner of curvature everywhere: there may be level of wealth, for instance, when he is a risk-lover and level of wealth when he is risk-neutral [...] this [could] explain why inhabitants may take low probability, high-payoff risks (e.g. lottery tickets) while at alike insuring against mild risks with mild payoffs (e.g. flight insurance)".
That open-handed of logic is one possible explanation for your second question; you only just need to rub down the theory. Your risk-averse entertainer is willing to put up near high probabilty risk when the potential loss is low (he can well afford it, he's analagous to the rich man in the other situation who can glibly afford the risk) but not willing to put up beside low probability risks which he can't afford.
As for your *first* question, you can apply alike logic, in totting up to more fundamental reasons. If you're risk-averse, you WILL insure against singular events; if you're risk-neutral or risk-loving, you're less promising to. Those fundamental reasons btw would include the certainty that people attach a discount rate to the adjectives: they'd rather own $x this year than $x next year (the bigger the discount rate the more compensation they'd obligation - say they'd be indifferent between $x this year and $2x subsequent or between $x and $10x ). Hence they'd rather forego insurance payments because they prefer have that money now compared to a possible pay-out contained by the future. The discount rate also take into account the certainty that money in the adjectives may never be collected: what's the point in insurance against intuitive disasters if something else kills you a long time since that? You'll find working-class people, who as a socioeconomic group live shorter lives, own a higher discount rate than middle-class populace.
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There's a unharmed field of study on these issues. Simply, the major motive for not taking insurance against "hurricanes in the UK" for example is that if it does come to pass, the govt will bail you out - not literally! Why pay out your own money immediately? And the secondary use is that the consequence is just too awful to contemplate, so population don't want to face that as a risk.
Your second ask is really answered by the fact that humans are not entirely normal when it comes to economics. The "expected value" might be the same, but we rate the "it won't transpire to me" more than the "I couldn't stand to lose that much" - so we insure for low value items, even when it's not normal. But bear within mind that really wealthy family don't insure, say, fridges and freezers, and govts. almost never insure anything.
I doubt you can seizure an irrational motive in a diagram, but please prove me wrong.
"It will never happen to me",
Money is required for unsophisticated needs and may not be available to purchase insurance.
Don't become conscious the second part of your Q. High utility doesn't equal low value.
I think you will find its down to public awarness and finances... It is also down to governmental regulations (and if they are enforced)