Market Evidence of Misperceived Prices and Mistaken Mortality Risks
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NBER Working Paper No. 9863*
Issued in July 2003
NBER Program(s): AG
HE
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We construct and implement a test of rational consumer behavior in a highstakes financial market. In particular, we test whether consumers make systematic mistakes in perceiving their mortality risks. We implement this test using data from secondary life insurance markets where consumers with a lifethreatening illness sell their life insurance policies to firms in return for an up-front payment. We compare predictions from two models: one with consumers who correctly perceive their mortality risk, and one with consumers who are misguided about their life expectancy, and find that our data are most consistent with the predictions made by the second model.
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