Copyright © 2010 Michael S. Finke et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper reviews household property risk management and estimates normatively optimal choice under theoretical assumptions. Although risk retention limits are common in the financial planning industry, estimates of optimal risk retention that include both financial and human wealth far exceed limits commonly recommended. Households appear to frame property losses differently from other wealth losses leading to wealth-reducing, excess risk transfer. Possible theoretical explanations for excess sensitivity to loss are reviewed. Differences between observed and optimal risk management imply a large potential gain from improved choice.