Most studies (such as Wakker et al. (1997), and Zimmer et al. (2009)) testing the hypothesis of probabilistic insurance so far used hypothetical payoffs. Zimmer et al. (2018) were the first to conduct an incentive-compatible experiment using real monetary payoffs. In their study, subjects were able to insure themselves against a potentially high loss. In contrast, the value to be insured in our study is relatively low. Subjects are exposed to the risk of a loss of 3,500 Talers. This occurs with a probability of 5%. Afterwards, three insurance contracts will be presented (in random order to avoid an order effect), which only differ in the probability of default, namely 0%, 0.1%, and 1% default probability. Subjects are asked to state their maximum willingness to pay. Since all subjects will be incentivized, they should state their true willingness to pay.
Prior to this insurance decision, subjects are equipped with different endowments and execute an investment task following Gneezy and Potters (1997) (see AEA RCT Registry “Relative Wealth Placement and Risk-Taking Behavior” [currently under review, we will edit this and replace it with a link given a positive review] for more details). As a result, two individuals can subsequently achieve the same wealth level, even though they have shown different levels of risk aversion previously. This way, we hope to disentangle wealth effects from other confounding effects such as risk aversion, cognitive effort, financial literacy, and other sociodemographic factors like gender.