Co-blogger Bryan Caplan wonders why people make the insurance choices that they do.
I think that insurance is one of those topics on which economists and non-economists are out of synch. People buy extended warranties for appliances, but as commenter Jim Glass points out, they don't buy long-term care insurance. It's hard to write down a rational utility function that implies such behavior.
Among the reasons that people may be less rational about insurance than other matters:
1. Poor grasp of the concept of probability, and little or no understanding of expected value and variance.
2. No reinforcement from repeated events. If you keep buying stuff that you don't like, you start to notice sooner or later. If you buy insurance you don't need, or fail to buy insurance that you do need, you may not get enough negative reinforcement to change your behavior. Or, by the time you do get negative reinforcement, it's too late to change your behavior.
For Discussion. What other irrational biases affect people's decisions with respect to insurance?