The impact of regret and worry on the threshold level of concern for flood insurance demand: Evidence from Dutch homeowners

Abstract

It has been argued that individuals behave according to a threshold level of concern decision rule when considering protection against risk: if the perceived probability of the risk is below a threshold level, then the likelihood of the risk is treated as zero and protection is deemed unnecessary. Little is known about the determinants of this threshold nor about whether individual thresholds are related to risk specific emotions like worry and regret. We study threshold probabilities and factors that influence these in the context of flood insurance decision making. Based on data collected from 1,041 Dutch homeowners, we find that on average the threshold level of concern for flood insurance demand is negatively related to the expected regret an individual might feel about not purchasing flood insurance if a flood occurs, as well as to worry about flooding.