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Type Master's Thesis
Scope Discipline-based scholarship
Title The Valuation of Rare Extreme Events - Insights in the Underinsurance Puzzle
Organization Unit
Authors
  • Flavio Caderas
Supervisors
  • Helga Fehr-Duda
Language
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 69
Date 2018
Abstract Text Many people like to watch the news on the television in the evening or even follow the news throughout the day. News is an interesting phenomenon to followers because there is something uncertain (game result, weather report etc.) which will be partly or even fully resolved. Uncertainty is an important part of everyone's life and almost every important decision has some kind of an extreme event involved. Let's take a day of skiing for example. Most people would not think about getting caught in an avalanche, however after a day of skiing one does sometimes hear exactly that happened somewhere. Alternatively let us think about the wedding day. Most people already think about the uncertainty which will resolve after the marriage: will the married couple stay together in their first years? In both cases, there is an extreme event involved, which has a great impact on a person's life. After all, most people overestimate the event of the divorce and underestimate the event of getting caught in an avalanche. The underestimation of rare extreme events may lead to underinsurance in the population. This paper will present an explanation of the underinsurance puzzle, based on the resolution of the uncertainty and the timing of the consequence. An experiment was conducted to test the existing literature. It verifies probability weighting functions if the consequence is immediate, and validates the more complex Missing-Link Model, when a time component is involved. The paper also presents direct improvements on how low probability, high impact events should be presented to subjects, through experience sampling. This would result in people being more rational.
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