From Flocks to Fortunes: Experience, Belief Updating, and Insurance Adoption

Adoption of index insurance tends to increase immediately after claim payment is made or after an adverse event and decrease during periods where there is loss or payment event. Such a pattern of insurance adoption is often interpreted to reflect an underlying belief updating process that is not fully Bayesian. In this paper, I examine whether it is indeed beliefs that explain this sensitivity of insurance adoption to recent experiences. Using a novel dataset of herders in Ethiopia that contained incentivized beliefs across four rounds of herding seasons, I find that beliefs cannot explain the effect of claim payment or loss experience on insurance adoption, even though there is suggestive evidence that beliefs are not updated in a fully Bayesian manner. The findings suggest that other behavioral factors may better explain the relationship between experience and insurance take-up.