Journal Files A.A.S
What we buy vs what we say as expression of demand
Kunreuther and Slovic suggest that we somehow combine the information from market behavior and what people say they want. Economists are skeptical of the latter because it does not force people to consider opportunity cost. Of course, that line of thought assumes that all decisions in markets do consider opportunity cost which is questionable (bounded rationality)..
K & S observe that people do not buy flood insurance even when subsidized. Is that proof enough that they do not want any public subsidy or any regulation such as that FHA loans for houses require insurance? The market behavior has a frame, namely it is a frame given by recent experience (anchoring). If we changed the frame by providing more information on flood history, would we change the market behavior? That would be costly for the entire flood plain population. What if we interviewed a sample after explaining the data and then asked if they would buy insurance. If the majority said yes, would the government be reasonable to save the cost of a massive education program and just require the insurance instead. That is, it is doing what most would do if they were in their planning calculating brain. Of course, we can't be in our calculating brain all the time. While it is possible for us to listen to a program on flood history we can't do this for all government programs even if the government had the resources to so educate us.
Through government, we can put flood insurance on the end of the aisle as in a supermarket and point out its opportunity cost ( lost opportunity). If we respond to this offer, is that our true demand? Or, is our true demand what we do in another market where flood insurance is offered without much information and competing with all other types of insurance and other goodies?
K & S are not very helpful in answering the above. The answer has profound implications for contingent valuation which I have discussed elsewhere.
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