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Journal of Financial Economics Vol. 148 No. 3 2023

Insurance and portfolio decisions: Two sides of the same coin?

Olivier Armantier1; Jérôme Foncel2; Nicolas Treich3,4,5

1 Federal Reserve Bank of New York · 2 Université de Lille · 3 Université Toulouse-I-Capitole · 4 Institut National de Recherche pour l'Agriculture, l'Alimentation et l'Environnement · 5 Toulouse School of Economics

open access

Abstract

We study insurance and portfolio decisions, two opposite risk retention tradeoffs. Using household level data, we identify the first joint determinants (e.g. subjective expectations, risk attitude) and frictions (e.g. liquidity constraints , financial literacy) in the literature. We also find key differences between the two decisions. Notably, contrary to economic intuition, risky asset holding and insurance coverage both increase with wealth . We show that this apparent puzzle is driven in part by a specific behavioral pattern (the poor invest too conservatively, while the rich over-insure), and can be explained by two factors: regret avoidance and nonperformance risk.

DOI
10.1016/j.jfineco.2023.03.003
Volume
148
Issue
3
Pages
201-219
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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