Self insurance and insurance demand under self-deception

A dynamic model of self insurance and market insurance demand against uncertain natural hazards is developed where agents incur emotional costs when the true information about potential future catastrophes becomes known. Agents purposefully ignore the incoming signals about future hazards in order to avoid finding out the true information. Faced with the emotional costs associated with true information revelation, self-deception through true information avoidance effort may be the optimal strategy to maximize current and future utility. Government interventions for complementing private risk mitigation and adaptation through incentives and regulations may have a varying influence on such agents exhibiting emotional costs.