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Consumers let history slip out of their minds when it comes to insuring their property, according to Wharton School professor Robert J. Meyer.
Using a video-game simulation, Meyer found that when asked to calculate the risk of hurricane damage, people woefully underestimate how much protection they'll need time and again.
The Journal's Christopher Shea explained the experiment: Players were primed to protect their homes by being told they'd receive a prize for maintaining their value. Next, they received a coastal house worth $50,000 and were asked to track a hurricanes' progress on a map. After that, the players were given the option to either insure their house $100 per 10 percent of protection, up to 50 percent, or all of it for $2,500.
No matter how fierce the storms or how badly the homes were damaged, players across the board "tended to reduce the amount of protection they bought whenever they had endured no damage in the previous round," said Shea—though the insurance had protected their home in the first place.
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