The Effect of Ambiguity Aversion on Self-Protection and Self-Insurance effort

모호성 회피성향이 손실 발생 확률 및 손실 크기를 줄이기 위한 노력에 미치는 영향

  • Hong, Ji-Min (Department of Business Administration, The Catholic University of Korea)
  • 홍지민 (가톨릭대학교 경영학부)
  • Received : 2018.01.29
  • Accepted : 2018.04.06
  • Published : 2018.04.30


This study examined the effects of ambiguity aversion on the self-protection and self-insurance efforts using a two-period model to consider the time difference between making an effort and occurring loss, which is in contrast with the existing one-period model. The loss follows a binary distribution while the distribution is ambiguous. The distribution depends on the state variable. First, the effort of ambiguity averse individuals is not always greater than that of ambiguity neutral ones. Second, the effects of absolute ambiguity aversion (AAA), which does not appear in one-period model, were observed. Not-increasing AAA is a sufficient condition to increase the efforts of ambiguity averse individuals compared to those of ambiguity neutral ones. In addition, the change in effort also depends on the probability function of the state. Lastly, the results hold even when the individual is risk neutral or risk loving. As a result, ambiguity aversion needs to be considered independently with risk aversion.


Ambiguity aversion;Absolute ambiguity aversion;Self-protection;Self-insurance;2-period model


  1. E.Issac, G.S. Becker, "Market Insurance, Self-insurance, and Self-protection.," Journal of political Economy, vol. 80, no. 4, pp. 623-648, 1972. DOI:
  2. F. R. Chang, "Property Insurance, Portfolio Selection and Their Interdependence.," CESifo Working Paper, no. 2260, 2008,
  3. G.Christian, "Insurance and Precautionary Capital Accumulation in a Continuous-Time Model," Journal of Risk and Insurance, vol. 61, no. 1, pp. 78-95, 1994. DOI:
  4. H.Huang, M. A. Milevsky, J. Wang, "Portfolio Choice and Life Insurance: The CRRA Case," Journal of Risk and Insurance, vol. 75, no. 4, pp. 847-872, 2008. DOI:
  5. S.H. Seog, "Risk and Insurance Demand," Working paper, 2015.
  6. S.H. Seog, J.M. Hong, "A Revisit to the Demand for Insurance: A Two-Time Model," Korean Insurance Journal, vol. 111, pp. 101-123, 2017. DOI:
  7. E.Louis .R. J. Huang, L.Y. Tzeng, "Precautionary Effort: a new look.," Journal of Risk and Insurance, vol. 79, no. 2, pp. 585-590, 2012. DOI:
  8. A.David, G. Christian, N. Treich, "The Effect of Ambiguity Aversion on Insurance and Self-protection.," The Economic Journal, vol. 123, no. 573, pp. 1188-1202, 2013. DOI:
  9. S. Arthur, "Ambiguity Aversion and the Propensities for Self-insurance and Self-protection.," Journal of Risk and Uncertainty, vol. 42, no. 1, pp. 27-43, 2011. DOI:
  10. J.M. Hong, "The Effect of Ambiguity Aversion on Precautionary Effort," Working paper, 2018.
  11. G. Christian. "Portfolio choices and asset prices: The comparative statics of ambiguity aversion," The Review of Economic Studies, vol. 78, no. 4, pp. 1329-1344, 2011. DOI:
  12. K. Peter, M. Marinacci, S. Mukerji, "A Smooth Model of Decision Making under Ambiguity.," Econometrica, vol. 73, no. 6, pp. 1849-1892, 2005. DOI: