HEC Research Papers Series,
HEC Paris

Abstract: We develop a behavioral model of affective decision-making where agents hold heterogeneous baseline beliefs. By observing coverage choices in insurance markets, we reveal underlying cognitive biases: under-insurance identifies optimism, while over-insurance identifies pessimism. To correct these distortions, we introduce policy interventions designed to shift perceived probabilities toward objective truth without altering financial payoffs. Finally, we establish sufficient behavioral conditions under which these campaigns successfully increase insurance demand, demonstrating that informational nudges are highly effective for strongly risk-averse agents.

Keywords: Optimistic Bias; Risk Awareness; Insurance; Behavioral Decision-Making

JEL-codes: D01; D81; D82; D91; G22

15 pages, September 18, 2026

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