Decision Making under Ignorance and Product Disclosure: Implications in Buying Insurance.
| Autor | Mendes-Da-Silva, Wesley |
I Motivation
The standard choice paradigm is supported by the assumption that individuals form their preferences between alternatives characterized by probabilities and results, as pointed out by Kleindorfer et al. (1993). However, one question which seems inevitable is: what happens when, in a real-world situation, there is no notion of probability, let alone the consequences of a given event? This situation assumes the existence of a context of ignorance (Health & Safety Executive, 2001; Maskin, 1979; Aven & Steen, 2010; Tchiehe & Gauthier, 2017). In parallel, Thaler and Tucker (2013) point out that studies that focus on the level of the individual tend to be more relevant, given that they represent a new class of products, with a potential value of US$ 4.1 trillion based on new internet supported technologies (World Economic Forum, 2012).
In this study, we examine whether the absence of relevant information in decision making regarding a given type of insurance influences the judgement of individual consumers. We specifically examine whether information related to the probability of equipment breaking, as well as the cost of repairing it, influences the willingness of an individual to acquire an extended warranty. We also verify the justifications presented by individuals in their decisions to buy (or not to buy) a warranty.
This topic is of interest not just to researchers, but also to managers in durable goods industries and insurance, as well as regulatory agents (Din, Abu-Baka, & Regupathi, 2017). Kunreuther et al. (2013a, 2013b) argue that the insurance market has an explicit condition for growth, since companies that offer protection know the demands of this type of financial product, and consumers know the services provided by insurance companies. It is within this context that a lack of necessary information to make economic decisions receives greater attention, above all in markets in which the typical level of formal education is reduced, and even in better educated individuals, there appears to be a lack of knowledge of these financial products (Hastings & Tejeda-Ashton, 2008; Lin, Hsiao, & Yeh, 2017).
Our research design employs data collected through two experiments, featuring the participation of more than 130 volunteers. The individuals were divided into two groups and participated in their data collection sessions at different times. The first group received information a priori and answered a group of questions regarding their willingness to buy a warranty. The other group began the experiment without the information relevant to their buying decisions and answered the same questions. We conducted tests via One Way ANOVA and regressions based on these data.
Our study offers two main results. First, considering the observations in aggregate, the availability of information about the probability of a product breaking, as well as the cost of repairing it, does not seem to significantly influence the willingness of individuals to acquire a warranty for electronic equipment. This suggests that typically people do not alter their willingness to acquire electronic equipment warranties in a significant manner, no matter whether they are making their decisions under ignorance or not. Second, our findings suggest that under ignorance higher warranty premiums inhibit the willingness of individuals to acquire this protection. This suggests that, if individuals have information about the probability of the equipment breaking and its repair costs, higher premiums do not significantly influence consumer willingness to acquire this warranty.
This study makes various contributions to the literature. It contributes to the literature regarding descriptive models of decision making, bearing in mind that we present evidence of individual behavior within contexts of ignorance. In addition, it makes a contribution to the normative theory of choice, in that more studies of decisions made under ignorance in institutional environments which are characteristic of emerging markets still merit research efforts. In dealing with the prescriptive implications of individual choices, this work contributes by providing consumers with information regarding the probability of electronic equipment breaking and its associated repair costs. It also contributes to the work of regulators, because it provides evidence of the potential impacts of programs that promote product disclosure, whether they are durable goods or financial services offered by insurance companies.
2 Theoretical and Empirical Underpinnings
Product disclosure is information provided to the consumer about a product's functionality and/or cost, normally during or after a transaction. Effective disclosure can help improve consumer choices, first by providing information about key aspects of the product in an engaging and understandable form, and second by helping consumers compare alternative products. Consumer engagement is the fundamental function of disclosure. Financial service products usually have difficulty in attracting engagement due to their abstract and intangible nature (Oxera, 2014). There are a series of products and services that consumers do not use sufficiently, and we can include insurance products in this group.
The distinction between risk, uncertainty, and ambiguity constitutes an important topic in the field of decision making at the level of the individual (Rubaltelli, Rumiati, & Slovic, 2010; Desrochers & Outreville, 2020). Knight (1921) is thought of as the first author to establish the distinction between these three concepts, and the results obtained by Arrow and Hurwicz (1977) were considered innovative at the beginning of the 1950s when they proposed properties of rationality. Since the work of Pratt (1964) and Arrow (1965), risk aversion within the context of economic decisions has been considered using theoretical and empirical models. In addition, according to Cabantous, Hilton, Kunreuther, and Michel-Kerjan (2011), ever since the work of Ellsberg (1961), the literature regarding questions related to ambiguity concerning probabilities within the context of decision making has received growing attention. Since then, a line of research has been developed concerning how individuals make decisions in the face of risk, uncertainty, or ambiguity (Camerer & Weber, 1992; Sokolowska & Zaleskiewicz, 2020).
2.1 Disclosure and financial product consumption decisions
The theoretical aspects of decision making under ignorance have been addressed by the economic literature over the past few decades (Benitez, Carpitella, Certa, Izquierdo, & Giang, 2015; Maskin, 1979). According to Giang (2015), ignorance and probability are opposite states of knowledge. On one hand, probability is derived from the knowledge of everything that can be reasonably known about a phenomenon whose results can be modeled as a random event. Ignorance, on the other hand, consists of a singular state of knowledge characterized by a complete lack of knowledge, or by the possession of no information regarding the phenomenon of interest. The main purpose of disclosure is to assure that the consumer has access to all information relevant to the buying decision (Office of Fair Trading, 2010). The finance literature has already documented arguments concerning the associations between the disclosure of relevant information and buying decisions regarding financial services (Agarwal, Chomsisengphet, Liu, & Souleles, 2015; Kunreuther et al., 2013a, 2013b; Robb, Babiarz, Woodyard, & Seay, 2015).
Bertrand and Morse (2011) argue that the design of an informational apparatus oriented towards the psychological aspects of individuals can induce choices at lower cost. Through a field experiment with payday loan stores in the United States, these authors concluded that information plays a central role in the financial costs assumed by the consumer. In particular, the results of Bertrand and Morse (2011) suggest that when a financial institution opts to emphasize the costs associated with rolling over a debt, consumer acceptance of credit decreases significantly in subsequent months.
An illustration of the interest of governments in the role that appropriate information can play in the quality of consumer decision making in terms of financial services can be observed in the United States. An agency called the Consumer Financial Protection Bureau
Various products, including financial services, have attributes that make disclosure of their characteristics more effective. In this sense, disclosure which is more effective i) engages consumers, ii) helps consumers understand the product, and iii) helps consumers make good decisions. In terms of what limits the effectiveness of product disclosures, Oxera (2014) lists the following items:
* Complex information: The complexity of some financial products, combined with the limited attention and cognitive ability of some consumers, highlights the relevance of product disclosure that helps consumers make appropriate decisions (Ben-Shahar & Schneider, 2011; Burke & Fry, 2019; Fichera & von Hinke, 2020; Sicherman, Loewenstein, Seppi, & Utkus, 2014).
* Difficulty in taking part: Financial services which are described in a summarized manner induce reduced attention on the part of consumers. Various disclosure techniques, such as reminders, can contribute in a positive manner (Laibson, 1997; Sicherman et al., 2016).
Uncertainty in terms of costs and returns: Some types of financial products involve immediate financial onuses and possible future gains, with some risk. Within this context, possible cognitive biases can lead to difficulties in the understanding of financial products, even when disclosure is adequately addressed. Thus, the value of a...
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