We propose a model of narrow framing in insurance and test it using data from a new module we designed and fielded in the Health and Retirement Study. We show that respondents subject to narrow framing are substantially less likely to buy long-term care insurance than average. This effect is much larger than the effects of risk aversion or adverse selection, and it offers a new explanation for why people under insure their later-life care needs.
Abstract
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Key Findings
- We evaluate how key elements from prospect theory shape insurance decisions and delayed retirement. Theory suggests that narrow framing plays a particularly important role in decision-making under uncertainty.
- We show that narrow framers have a substantially lower demand for long-term care insurance, and the result is robust to controlling on a host of factors including health, cautiousness, risk aversion, probability of needing LTC, and socio-demographics.
- Narrow framing is a more important deterrent to people’s LTC insurance purchases than factors previously suggested, such as risk aversion and private information.
- Narrow framing, therefore, is an important contributor for people’s unwillingness to buy long-term care coverage, thus exposing them to old-age poverty.