Market Evidence of Misperceived Prices and Mistaken Mortality Risks

This paper develops a market-based test of whether consumers make systematic mistakes in assessing their own mortality risks, and whether they are able to make 'correct' price comparisons between insurance and credit markets. This test relies on data from secondary life insurance markets, wherein consumers sell their life insurance policies to firms in return for an up front payment. We find evidence consistent with the hypotheses that: (1) unhealthy consumers are systematically too optimistic about their mortality risks and (2) consumers focus on nominal price information in deciding to sell life insurance, rather than on the real discounted expected price.