Behavioral Economics and the Demand for Insurance

Abstract

While neoclassical economic models have provided significant insight into policy and economic behavior, these models fail to take into account actual human behavior outside of what is defined as rational. These anomalies in human behavior from what neoclassical models predict creates problems when looking to implement effective policies in practice. Through examining one such application of this problem in the demand for insurance, this paper examines the work of several behavioral economists in an attempt to understand where current consumer behavior strays from what neoclassical economists predict. This paper pinpoints the resulting difference in consumer behavior and seeks to understand its specific causes. Following a discussion of the literature, this paper argues that there remains a need to investigate the root causes of this anomalous behavior in order to effectively influence insurance policy to ensure consumers are purchasing both the right type and amount of insurance to best fit their needs.