We study insurance and portfolio decisions, two opposite risk retention tradeoffs. Using household level data, we identify the first joint determinants (e.g. subjective expectations, risk attitude) and frictions (e.g. liquidity constraints, financial literacy) in the literature. We also find key differences between the two decisions. Notably, contrary to economic intuition, risky asset holding and insurance coverage both increase with wealth. We show that this apparent puzzle is driven in part by a specific behavioral pattern (the poor invest too conservatively, while the rich over-insure), and can be explained by two factors: regret avoidance and nonperformance risk.
Olivier Armantier, Jérôme Foncel, and Nicolas Treich, “Insurance and Portfolio Decisions: Two Sides of the Same Coin?”, TSE Working Paper, n. 23-1425, April 2023.
Olivier Armantier, Jérôme Foncel, and Nicolas Treich, “Insurance and portfolio decisions: Two sides of the same coin?”, Journal of Financial Economics, vol. 148, n. 3, June 2023, pp. 201–219.
Journal of Financial Economics, vol. 148, n. 3, June 2023, pp. 201–219