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The prevention puzzle
1Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, The Netherlands.
The Geneva Risk and Insurance Review
|July 25, 2022
Summary
Economic theory struggles to guide prevention policy, a challenge known as the "prevention puzzle." New research suggests prudence, likelihood insensitivity, and loss aversion contribute to underprevention, offering insights for policy.
Area of Science:
- Economics
- Public Policy
- Behavioral Economics
Background:
- The Ehrlich and Becker model (1972) proposed a simple framework for prevention (self-protection).
- Subsequent research, primarily using expected utility theory, has yielded limited policy-relevant predictions, creating the "prevention puzzle."
Discussion:
- This article explores the "prevention puzzle" by reviewing existing literature and presenting new findings under non-expected utility theory.
- The impact of risk aversion on prevention decisions is complex and multifaceted.
- Three key factors—prudence, likelihood insensitivity, and loss aversion—consistently contribute to underprevention.
Key Insights:
- Under non-expected utility, prudence, likelihood insensitivity, and loss aversion are identified as unambiguous drivers of underprevention.
- These behavioral factors complicate the derivation of clear policy guidance from economic models of prevention.
- The study highlights the limitations of traditional economic paradigms in addressing real-world prevention decisions.
Outlook:
- Future empirical research is crucial for a deeper understanding of prevention decision-making.
- Integrating insights from behavioral economics can help resolve the "prevention puzzle."
- Developing more nuanced theoretical models is essential for effective public policy on prevention.
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