Decision theories and probabilistic insurance: an experimental test

This paper reports the results of an experiment in which probabilistic insurance, as proposed by Kahneman and Tversky (1979), is compared both with full insurance and no insurance. The experimental results conform to the intuitive prediction that risk-averse agents who are indifferent between full insurance and no insurance, will prefer full insurance to probabilistic insurance and probabilistic insurance to no insurance. The first conclusion is incompatible with the predictions of expected utility theory, and the second with Kahneman and Tversky's prospect theory. We also show that Loomes and Sudgen's regret theory can easily accommodate these intuitive results. JEL Classification: C91, D81. We are most grateful to Graham Loomes and two anonymous referees for their very helpful comments. Financial support from the Ministerio de Ciencia y Tecnología, under project BEC2001-0535, and from the Generalitat Valenciana under project GRUPOS03/086, is gratefully acknowledeged.