May 27: Jiakun ZHENG's PhD Defense

May 27, 2020 Research

Jiakun ZHENG will defend his thesis on « Essais sur l’Economie Comportementale et la Prise de Décision en Situation d’Incertitude », next wednesday 27 at 1.PM via Zoom meeting

If you want to join the meeting, please contact the supervisor Christian Gollier

Supervisor: Christian GOLLIER

Memberships are:

Abstract

This dissertation consists of three chapters, which have a unified theme on behavioral economics and decision making under risk and uncertainty. In all the three chapters,  I have incorporated psychology such as cognitive bias, social preferences and emotions into economics, and have studied their implications in insurance and risk management. I have also conducted monetary-incentivized laboratory experiments to provide evidence for the models I have built. The main takeaways from this long-term research plan are that human decision making is far more complex than what traditional economics assume and it thus becomes crucial to model this complexity into economics in order to answer some policy-relevant questions. Overall, I demonstrate that this type of interdisciplinary research can deepen our understanding of human behaviors and improve the design and implementation of public policies. Below, I elaborate briefly on what are the research questions I ask in each chapter and what are the main findings.
In the first chapter, I study insurance decisions when the policyholder evaluates insurance not only as a hedging instrument but also as a gamble in isolation due to narrow framing. I show that due to aversion to risk on the net insurance payoff, i.e., insurance indemnity minus insurance premium, narrow framing reduces insurance demand in the form of both coinsurance and deductible insurance. This helps explaining the observed low demand for health and disaster insurance. I also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy. In an incentivized lab experiment, I document substantial effects of narrow framing on hedging. Estimating a structural model, I find that people give a weight of 43% to the utility from evaluating insurance in isolation and 57% to the hedging value of the contract. I also find that individuals with lower cognitive abilities and lower demand from insurance place a significantly higher weight on the evaluation of insurance in isolation.
In  the  second  chapter,  my  coauthors  Hélène  Couprie,  Astrid  Hopfensitz  and  I  ask the question about how social preferences affect group risk taking. Risk is rarely an individual phenomenon and often shared in groups. In the case of informal insurance
situations, individual risk preferences have to face the risk preferences of the group. We study for the case of spouses, how individual versus household risk preferences interact in an experimental paradigm. 202 cohabiting spouses (101 couples) participated in a controlled experimental risk-taking task. We focus on a household risk task, in which spouses face the choice between an option in which risk is correlated (high household risk, low inequality among spouses) and an option allowing for hedging (low household risk, high inequality among spouses). We show that spouses are mainly influenced by household risk and do not react to inequality as long as payoffs are symmetric. However, when payoffs become asymmetric, because one of the spouses’ risk is reduced, we observe a change in preferences. Specifically, our results suggest that households put a higher weight on men’s individual risks. We further observe that married couples put a higher weight on expected utilities from joint household payoffs.
In the last chapter, I examine the impact of anticipated regret on risk management. Prevention decisions that reduce individuals’ health risks are important, generally irreversible, and particularly difficult since they imply a trade-off between two important attributes: the safety and its cost. All those features make regret more likely to be anticipated. Here, I study the willingness to pay for reductions in health risks within a framework of anticipated regret. I show that with other things being equal, an individual who is disproportionately averse to large regrets has a higher willingness to pay than a standard expected utility individual. This notion of regret aversion has been shown to be able to explain many decision patterns which violate standard expected utility theory. Moreover, the effect of regret aversion on willingness to pay can be interpreted as if the regret averse individual overweighs risk reductions due to prevention, i.e., probability overweighting effect. I further discuss how the resolution of uncertainty may affect the regret averse individual’s willingness to pay.
To summarize, this dissertation shows that incorporating psychology into economics can improve our understanding of risk behaviors and can have vast implications in policy making. With wide adoption of experimental methods in economics, existing theories (or conventional wisdom) would be tested and possibly be rejected. Sometimes, new and unexpected findings could also be discovered from experimentation. It therefore becomes important for economists to come up with more realistic models so that we can either make better predictions or conduct more accurate welfare evaluation. I believe that more future work in these directions, both empirical and theoretical, is certainly desirable, and I also expect myself to continue this research plan in the coming years.