Abstract

Human emotions frequently supersede rationality, and the comprehension of probabilities is a cognitive challenge for individuals. Within the realm of insurance decision-making, our choices often deviate from optimality. Notably, the comparison between a low-probability-high-consequence risk, such as the threat of a flood, and a high-probability-low-consequence risk, like bicycle theft, reveals an irrational tendency to prefer insuring against the latter over the former. Surprisingly, individuals exhibit a proclivity to opt for coverage against high-probability-low-consequence risks, such as bicycle theft, even when confronted with the alternative of insuring against low-probability-high-consequence risks, like flooding. Additionally, there is a common inclination to augment homeowner’s insurance policies with add-on coverage for bicycle theft, neglecting the consideration of coverage for the more severe risk of loss due to flooding.