The demand function for insurance : comparison of maximization of Pareto probability of survival with the expected-utility theory (von Neumann & Morgenstern) and the asymmetric value function (Kahneman & Tversky)
Abstract
This paper presents the results of a comparison of an original theoretical concept of modeling human decisions under risk with two well-known models. In the paper the demand function for insurance is constructed for the model of maximization of the probability of agent's (economical) survival.
This demand function is compared with the demand function in two other models: the expected-utility theory (von Neumann, Morgenstern) and the asymmetric value function (Kahneman, Tversky). While in the expected-utility model the poorest agents are most interested in insurance, in the Kahneman-Tversky model the poorest agents do not buy insurance because of their liking for risk.
The model of maximisation of the probability of survival corresponds better to the real structure of the insured: neither extremely rich people, nor extremely poor people accept insurance contracts. The former do not accept the game because of the negative expected value of the gains.
For the latter the insurance is too expensive in relation to their income.