Insurance and portfolio decisions entail risk retention tradeoffs, according to research. Researchers found that subjective expectations, risk attitude, liquidity restrictions, and financial literacy drive these choices by evaluating household-level data. Contrary to economic perception, money increases hazardous asset holding and insurance coverage. The poor invest cautiously while the rich over-insure due to regret avoidance and nonperformance risk concerns, explaining this seeming conundrum.

Image courtesy of interviewee. December 20, 2023