Behavioral Aspects of Household Portfolio Choice: Effects of Loss Aversion on Life Insurance Uptake and Savings

This paper investigates how loss-aversion affects individuals' decisions on savings and insurance purchase. Specifically, this empirically tests if prospect theory's loss aversion decreases demand increases demand. Prospect theory predicts that boundedly rational consumers may view pure protection insurance, such as term-life a risky investment because the insured lose premiums bad event does not occur within pre-specified term. Hence, those who are fairly sensitive to potential choose buy insurance. Instead, they more safe option prepare for uncertain future events by increasing precautionary saving. prediction using individual-level data from Health Retirement Study (HRS) finds empirical evidence consistent with prediction: loss-averse individuals less likely own whole-life which serves partial instrument. These also hold higher level of wealth than others, suggesting tend save (presumably motives), all other things being equal.