Poor Economics: Rethinking Poverty & the Ways to End it

by Abhijit V. Banerjee

The second issue is the problem of time inconsistency, which we already encountered in our chapter on health. When deciding whether or not to buy the insurance, we need to do the thinking now (and pay the premium), but the payout, if any, would take place in the future. We have already seen that this is a type of reasoning human beings are particularly bad at doing. The problem is made even harder when the insurance is against a catastrophic event:The payout would take place not only in the future, but in a particularly unpleasant future that no one really wants to think about. Not spending too much time anticipating these events may be a natural protective reaction, and this may explain why people were more likely to buy insurance after they were forced to think about it by answering a survey.