Do bad risks know it? Experimental evidence on optimism and adverse selection

► Derives relation between optimism, insurance demand and loss probability. ► Devises and implements experiment to investigate the relationship. ► The higher the demand to insure against failing in the experimental task, the more realistic are performance forecasts. ► Subjects holding travel insurance have more realistic performance forecasts. ► Findings imply heterogeneous dispositional optimism offsets adverse selection.