ABSTRACT
Given the opportunity to purchase insurance or otherwise protect themselves against low-probability, high-consequence risks, people often behave in ways that are surprising from a decision-making or economic perspective. For example, in the case of hazardous wastes (Smith and Desvouges, 1987; McClelland, Schulze, and Hurd, 1990), many peo ple have inexplicably large values for avoiding low-probability risks. Yet in other cases, such as floods (Kunreuther et al., 1978), many people refuse to purchase insurance against objectively greater risks. We report here two laboratory studies that investigate insurance behavior in both low-probability and high-probability risk situations. It is dif ficult or impossible to replicate the high-loss nature of significant real-world risks in the
laboratory, but it is possible to determine whether insurance behavior at relatively low probabilities (e.g., .01) differs from insurance behavior at relatively high probabilities (e.g., .9).
