Risk misperception and selection in insurance markets: An application to demand for cancer insurance

Spinnewijn (2013) posits that optimism about risk and the efficacy of risk-reducing effort could cause selection in insurance markets. We test for this using a survey of 474 subjects' demand for hypothetical cancer insurance. We elicit perceptions of baseline cancer risk and control efficacy and combine these with subject-specific cancer risks predicted by the Harvard Cancer Risk Index to develop measures of baseline and control optimism. We find that only 23 percent of our subjects would purchase a fair insurance contract aligned to their true risk type. Of these subjects, 94 percent also overinvest in prevention, leading to advantageous selection.