Poor households in low-income settings experience a myriad of risks; droughts, floods, unstable income and employment opportunities, and disease and early death (Fafchamps, 1999). As a result, they may be more tolerant to risk (be less risk averse) than individuals who grow up in less risky environments. In addition, very low and volatile daily (cash) income levels may lead to very high individual discount rates. Low risk aversion and high discount rates may explain the apparently low effective demand for prepaid health insurance among low-income people. Furthermore, being struck by a deadly disease (notably HIV/AIDS) may further reduce risk aversion because those individuals may ‘value the future less’ (Lammers, 2008). The impact of the level of risk aversion and the variation in individual discount rates in the developing world on intertemporal decision making has been extensively researched for agricultural purposes (Binswanger, 1980; Duflo et al., 2008). Much less is known about the impact on decision making in other areas, such as buying prepaid health insurance. Further research in this area, through experimental research and real-life field pilots, is likely to increase our ability to design and roll out health insurance products that are more attractive to the poor.That is from an article (van der Gaag and Stimac, Health Economics, Dec. 2011 ) that looks at health insurance in developing countries. The article is titled "How can we increase resources for health care in the developing world? Is (subsidized) voluntary health insurance the answer?". It adds:
Thornton et al. (2010) observed that households do not enroll in health insurance even when their actual health expenditures exceed the insurance premium. Such apparently ‘irrational’ behavior is not uncommon in low-income settings. Although rational choice theory has been a powerful corner stone of (development) economics, an increasing number of experimental studies show that the generalized axiom of revealed preference (GARP) is often violated (Sippel, 1997). Interestingly, evidence also suggests that such GARP violations are less common in environments that resemble conventional (competitive) market situations (List and Millimet, 2008). A recent study by Cecchi shows that sesame farmers and brokers, who are used to rely on personal contacts for their trade, significantly reduce ‘irrational behavior’ (i.e., GARP violations) after just 1 day of exposure to real market competition in an experimental auction setting (Cecchi, 2010). Thus, rational decision making can be ‘learned’, either in experimental or in real-life settings. As for the latter, when it comes to health insurance, researchers and practitioners would be well advised to be patient. (Large) health expenditures are rare events, so the benefits of prepaid insurance accrue only slowly over time. Extensive information campaigns up-front, and targeted follow-up campaigns during the roll-out of the insurance, may be necessary to speed up the learning process. It may easily take a few years before individuals find out for themselves how beneficial formal insurance can be before they give up their so-called ‘irrational’ behavior.