Market evidence of misperceived mortality risk |
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Authors: | Jay Bhattacharya Dana Goldman Neeraj Sood |
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Institution: | aCenter for Primary Care and Outcomes Research, Stanford Medical School, 117 Encina Commons, Stanford, CA 94305-6019, United States;bRAND, 1776 Main Street, Santa Monica, CA 90401, United States |
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Abstract: | We construct and implement a test of rational consumer behavior in a high-stakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a life-threatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model. |
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Keywords: | Life insurance Mortality Rational Expectations |
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