I wonder whether there is any theory apart from the expected utility theory, which is subject to several criticisms and the prospect theory, that can be used to explain the individual's motivation for buying insurance?
I also wonder whether it is possible to use the expected utility theory to arrive at a demand function for buying insurance, considering coverage as the quantity?
regret minimization is a viable option. you should first find out from a literature review if this has aver been applied to the specific research field you are involved with. regards
Edoardo
I am not quite sure wrt buyer,but wrt seller,the popular concepts are adverse selection and moral hazard..(these are popular concepts in information economics)
Yaari's dual theory of choice under risk is a possibility. Note however that the expected utility theory, Yaari's dual theory and the cumuative prospect theory (and some other classical theories) are a priori designed to model/explain behaviour of decision makers with state-independent (law invariant) preferences, In other words, these theories assume that people care only about the distribution of wealth and not about the states in which wealth is received, This feature makes these theories perhaps less suitable to explain the demand for insurance. One example to illustrate this point: people probably buy fire insurance because they receive the money when they need it most, ie when their house burns down, meaning that their preferences are state-dependent.
Thank you Steven! Your point is very interesting. I am somewhat inclined towards prospect theory, which predicts non - expected - utility - theory - complying behaviours in extreme events, which in turn bring the case of insurance closer. However, indeed initial wealth does play a role.
Yet, is not it the fact that initial wealth is already incorporated in risk aversion coefficient?