Article ID: | iaor20164559 |
Volume: | 12 |
Issue: | 3 |
Start Page Number: | 122 |
End Page Number: | 129 |
Publication Date: | Sep 2015 |
Journal: | Decision Analysis |
Authors: | Meeker Daniella, Thompson Christin, Strylewicz Greg, Knight Tara K, Doctor Jason N |
Keywords: | marketing, behaviour |
The success of extended warranties and buyer protection plans suggests that insurance against a small loss has high decision utility. We explore whether the behavioral insight that people are highly averse to small chances of loss can be used to create a powerful incentive that has very low expected value. We compare decisions of individuals offered fixed payments for healthy choices to those offered insurance in exchange for healthy choices. We test the prediction that aversion to small losses will result in very high rates of health behavior uptake in exchange for insurance. Three hundred participants endowed with a $2 bonus randomly received one of two incentives for completing a scheduled health risk assessment: (1) an insurance guarantee against the 1% risk of losing the $2 bonus or (2) a fixed payment at the expected value of the insurance. Relative to the fixed payment condition, participants in the insurance intervention were 70% more likely to meet their health risk assessment appointment (p < 0.01). Fixed payments of $2.59 were needed for every $1 spent on insurance to achieve the same behavioral effect. Loss aversion, probability weighting, and the certainty effect may account for this result. Incentive design may benefit from utilizing an insurance paradigm.