Use of Shared and Private Information in Long-Term Care Risk Perceptions

Misperception of long-term care (LTC) risk may distort insurance and saving decisions. Comparing older Americans’ subjective probabilities of nursing home entry with realized outcomes, we find LTC risk perceptions are inaccurate, partly due to inappropriate weighting of risk factors insurers can observe. Risk perceptions capture only 37% of the potential discriminatory power of this shared information. Private information offsets only one third of the resulting inaccuracy. LTC insurance take-up is positively associated with perceived risk even after adjusting for confounders and reverse causality. These findings are consistent with selection out of insurance partly due to underutilization of shared information.