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Nanyang Business School Forum on Risk Management and Insurance

Willingness to pay for reductions in morbidity risks under anticipated regret

by | Sep 29, 2018 | Economics, Health Insurance, Prevention, Regret Aversion | 0 comments

Tags: regret, willingness to , morbidity risk, health policy, EGRIE
More from: Jiakun Zheng

Editor’s Note: Posted by Jiakun Zheng, Toulouse School of Economics, France. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018

Benefit and analyses of public programs with the objective of reducing morbidity risks require an estimate of the monetary value of health. Most of this literature has made a crucial assumption that people are standard expected utility maximizers. Empirical evidence abounds, however, that people violate standard expected utility in systematic ways. Assuming standard expected utility in the face of such violations may lead to biased risk valuations and, consequently, to biased policy recommendations. One important reason for why people deviate from expected utility is that they not only value the outcome obtained from their decisions, but are also sensitive to whether their decisions were correctly made ex-post. People experience regret when realizing or imagining that their current situation would have been better, if they had decided differently. In particular, when facing decisions about ones’ health or lives such as whether working in a dangerous sector or not, people tend to be more likely to anticipate regret and act upon it. This is because these decisions are important, difficult and generally not easy to undo.

In the context of prevention of morbidity, people could potentially feel two types of regret: regret for having wasted money in a costly prevention which turns out to be either not effective or not needed, and regret for not having invested in it which could have been used and effective. Within a standard framework of prevention decision, I show that an individual who is disproportionately averse to large regrets is willing to more than a standard expected utility individual ceteris paribus. Intuitively, this notion of regret aversion means that the regret sensitive individual prefers experiencing two small regrets separately instead of the sum of them at once. Moreover, in the literature of regret theory, this notion of regret aversion helps to reconcile with many risk taking behaviors which are in line with standard expected utility theory, such as coexistence of gambling and insurance, reversals of preferences and etc. Interestingly, the effect on the willingness to due to disproportionate aversion to large regrets is equivalent to a probability overweighting effect. In other words, the regret averse individual behaves as if she overweighs the size of risk reduction. This reflects on the fact that people often exert too much effort in prevention, just in case.

This paper provides us a better understanding about how regret may affect prevention behaviors. It also raises some questions about how public policies should be designed and how the estimated willingness to should be used for policy implementations. Namely, should governments try to minimize regret which is the most frequently felt negative emotion? For instance, since regret is only felt through choices, enforcing certain policies may help individuals reduce regret. However, this may not be supported from a liberal point of view. Also, should the estimated willingness to which reflects individuals’ regret concerns be used at face value or be “debiased” for further policy decision making? The answer crucially depends on how we define social welfare and economic efficiency. As we shall see, there is no easy answer for either of these types of questions. More future research works should be done in these directions.

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