Cognitive Dissonance

Introduction The term cognitive dissonance which is associated with Leon Festinger came into existence in 1957. It is used to describe a psychologically disturbing state or imbalance that occurs when there is inconsistency about various cognitions on a thing. The most common examples of inconsistent cognitions are the awareness that smoking is harmful to the health, the belief that it is pleasurable and the urge to smoke.Advertising We will write a custom essay sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More Cognitive dissonance motivates actions to reduce dissonance. Cognitive dissonance theory argues that individuals possess cognitive elements about themselves, their past behavior, their beliefs and attitudes and their environments. Consonance is said to occur when one cognitive element follows from another. If one does not follow another, they are said to be dissonant and this creates psychological tension refer red to as cognitive dissonance. Since cognitive dissonance is associated with psychological disturbances, individuals change the dissonant cognitive elements to reduce dissonance. Cognitive dissonance takes place after individuals make decisions and before efforts to reduce dissonance are made. Analysis Most people ask themselves whether the qualities or characteristics of services can influence the possibility of cognitive dissonance. This can be addressed by looking at some of the things that characterise services. They include intangibility, inseparability, lack of faith and perishability. It is believed that these characteristics of services, the marketing problems that emerge and marketing strategies used in dealing with problems encountered cause cognitive dissonance among consumers of services Intangibility leads to lack of protection through patents and makes it difficult to display or communicate services. These problems do not only make marketers uncomfortable but also the consumers. It is more difficult to evaluate services than it is to evaluate goods. As consumers purchase services, they face more risks than the ones they face when purchasing consumer goods. Intangibility therefore increases the difficulty of making the decision to purchase and the perceived risks involved in the process of purchasing . Inseparability poses a challenge in that it forces the customer to be involved in production. It is also a problematic idea in that once customers get involved in production; it becomes difficult to produce services on a mass scale at a central location. In addition, the provider is seen as the service itself, something which is disadvantageous. Dissatisfaction as a result of the services received causes customers to feel responsible for the problem. This is however different when they purchase the goods. Customers play an important role in satisfactory delivery of the service. As a result, they may have more complaints with regard to services than the goods. Special requests by customers may also be associated with varying prices for the same product. Such problems are believed to cause variability in the type of services the customers get thus initiating cognitive dissonance.Advertising Looking for essay on health medicine? Let's see if we can help you! Get your first paper with 15% OFF Learn More Perishability implies that it is not possible to keep inventories of services. Charging different prices to different customers is often the strategy used by marketers to avoid losing revenue. In addition, they use contests, coupons and premiums. An increase in the variability of service prices which is a marketing strategy used to respond to perishability increases the likelihood of cognitive dissonance among consumers of perishable goods. Although cognitive dissonance has been discussed in different types of literature, it does not have a reliable scale to measure it. However, it can be assessed using a 22-item sc ale immediately after purchase. In the past, different indirect measures have been used to find out the occurrence of cognitive dissonance. In addition, more direct measures such as physiological measures have also been used. The process of developing a scale for measuring cognitive dissonance starts with an exploration of the cognitive dissonance domain. Since there are various definitions and distinctions of the concept, researchers have attempted to develop a scale that can measure both the cognitve and emotional aspects of dissonance in the post purchase and pre-use phase of consumption. The first stage in the development of the scale is the scale item generation. This involves generating a total pool of more than hundred dissonance items from exploratory research involving four focus groups with consumers. The validity of the content is then assessed by consumer behavior experts who are given the emotional and cognitive definitions of dissonance used in the study. During the pr ocess of scale development, the adequacy with which a specified domain of content is sampled is a major consideration. Scale item generation is followed by the first stage of data collection and purification. Since the first stage alone is not enough, it is followed by the second stage of data collection and purification. These processes are believed to establish important facts associated with cognitive dissonance. Dissonance follows a personal decision but may take place throughout the whole process of decision making and may never disappear completely. Its presence, magnitude and effects should be studied in all stages of the decision making process . Consumer behavior is usually an interesting area to focus on. It involves a clear understanding of the psychology of the buyer and external influences such as culture, reference groups, family and social class. However, it is fortunate that there is basic knowledge about consumer behavior that exists and can be used by industries to make important decisions. Cognitive dissonance theory states that at some points, there are bits of relevant cognitions which may not be consistent with one another.Advertising We will write a custom essay sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More The theory appears fascinating to most researchers and practitioners since it presents marketing implications which appear to contradict tradition. For instance, advertising is intended at converting potential customers into buyers and once sales are made, the business comes to an end. Dissonance theory on the other hand implies that the purpose of advertising starts after a consumer buys the product. Advertising only facilitates the attempt to rationalize the choice by the attractiveness of the brand the customer chooses. For instance, companies that advertise their goods are believed to make more sales since reading advertisements instigates the buying behavior. However, the dissonance theory predicts otherwise by arguing that the buyers of a product tend to read advertisements more often than those who do not buy the product. According to cognitive dissonance theory, when one brand is chosen more by customers, its rank position goes upward while the rejected brand goes downwards (Oshikawa, 1969). Conclusion There is the need for more research to be conducted on the area of cognitive dissonance and the ever increasing importance of services. Services have been impacting the world economy in an enormous manner. Earlier reasearchers have also indicated the need to conduct more research on cognitve dissonance. They argue that it is of great concern since majority of consumers exhibit some form of dissonance occasioned by many factors. References Oshikawa, S. (1969) can cognitive dissonance theory explain consumer behavior? Journalof Marketing, 33(4), 44-49. Kansal, P., Bawa, A. (2008) Cognitive Dissonance and the Marketing of Services: Some Issues. Journal of Services Research 8(2), 32-51. Sweeney, J. (2000). Cognitive Dissonance after Purchase. Psychology and Marketing , 17(5), 369-385.Advertising Looking for essay on health medicine? Let's see if we can help you! Get your first paper with 15% OFF Learn More This essay on Cognitive Dissonance was written and submitted by user Maxim Casey to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here. Cognitive Dissonance Cognitive Dissonance Cognitive dissonance refers to the discomposure that is triggered when one is unable to choose from contradictory views. It occurs in many real life situations where an individual’s behavior conflicts with integral beliefs to his or her self-identity.Advertising We will write a custom essay sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More When a conflict arises between belief and behavior, something should change in order to reduce or eliminate the dissonance (McConnell Brown, 2010). Control There are various strategies that one should apply to minimize cognitive dissonance. This includes paying attention to supportive beliefs that outweigh the dissonant behavior or belief (Fiske, 2010). It also entails the reduction of the utility of the conflicting belief. The other aspect is the adjustment of the conflicting beliefs to align them with other beliefs or behavior. Cognitive dissonance pl ays an important role in making judgments, decisions, and in evaluations (Egan, Santos Bloom, 2007). Arguments on the Impact of Cognitive Dissonance There are two theories related to cognitive dissonance. This includes the theory of cognitive dissonance by Festinger and Carlsmith. The other one is the self-perception theory by Daryl Bem. Of the two, Festinger and Carlsmith have a strong argument on the impact of cognitive dissonance. In self perception theory, Daryl Bem argued that people develop their attitudes by observing their own behavior. This theory does not mention that people experience dissonance, which they later seek to relieve (Nier, 2010). This adds marks to the theory of cognitive dissonance and makes it clear that the self-perception theory cannot account for all the laboratory findings by itself (Sanderson, 2009).Advertising Looking for essay on psychology? Let's see if we can help you! Get your first paper with 15% OFF Learn More In the theory of cog nitive dissonance, dissonance is held as an unpleasant tension or a negative drive state, which the individual is motivated to reduce. In one of Festinger and Carlsmith’s experiments, some participants were bribed with one dollar and were asked to lie to another participant about how enjoyable the boring task was. They gave in and rated the task for its enjoyment. There were inconsistencies noted with respect to their attitudes that led to dissonance. The dissonance was noted in the distress of the participants while lying. The other group that was not bribed had an obvious external justification for their behavior and thus suffered less dissonance (Nier, 2010). The theory of cognitive dissonance is well armed to account for any or all laboratory findings by itself. The literature supports the existence of cognitive dissonance. Psychologists have incorporated dissonance into the basic studying processes. The theory of cognitive dissonance has helped students by motivating the m in studies (Martinie, Olive Milland, 2010). In Aronson and Carlsmith’s experiment, the children refused to play with the toy. This was the case even after the withdrawal of the threat. In an experiment by Jack Brehm, cognitive dissonance is shown by the 225 female students as they were making a difficult decision. Still, after one makes a choice between two things, one feels that there is something good about the rejected choice. He or she suffers the opportunity cost of rejecting it. In such a case, the opportunity cost is the dissonant. As suggested by the theory, the research by Aronson and Mills in social psychology hold that dissonance is aroused by an occurrence of an unpleasant activity (Nier, 2010). There is a very good example showing cognitive dissonance among smokers. It has been established that cigarette smoking leads to cancer, and smokers are aware of the risk.Advertising We will write a custom essay sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More Relating this issue with the theory of cognitive dissonance, it can be noted that smokers experience dissonance given their urge to smoke is threatened by the reality that smoking is harmful to their health. The above research and experiments support the theory of cognitive dissonance. References Egan, L. C., Santos, L. R., Bloom, P. (2007). The origins of cognitive dissonance: Evidence from children and monkeys. Psychological Science, 18, 978-983 Fiske, S. T. (2010). Social beings: A core motives approach to social psychology. Hoboken, NJ: J. Wiley. Martinie, M., Olive, T., Milland, L. (2010). Cognitive dissonance induced by writing a counterattitudinal essay facilitates performance on simple tasks but not on complex tasks that involve working memory. Journal of Experimental Social Psychology, 46, 587-594. McConnell, A. R., Brown, C. M. (2010). Dissonance averted: Self-concept organization moderates the effect of hypocr isy on attitude change. Journal of Experimental Social Psychology, 46, 361-366. Nier, J. (2010). Taking sides: Clashing views in social psychology. Boston: McGraw-Hill Higher Education. Sanderson, C. A. (2009). Social psychology. Hoboken, N.J: Wiley.Advertising Looking for essay on psychology? Let's see if we can help you! Get your first paper with 15% OFF Learn More This essay on Cognitive Dissonance was written and submitted by user Abr1l to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here. Cognitive Dissonance Introduction Organizational or personal set ups often require instances of decision making. Whether made at personal or corporate levels, individuals are faced with instances of making decisions under competitive options.Advertising We will write a custom research paper sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More This condition always presents discomfort in emotions. The uncomfortable emotion that is experienced as a result of having conflicting ideas is called cognitive dissonance. This paper seeks to discuss cognitive dissonance. The paper will look into the theory of cognitive dissonance as well as reactions and concepts that are characteristic of the condition. Cognitive Dissonance Cognitive dissonance is a philosophical theory that was developed by Leon Festinger at the beginning of the second half of the twentieth century. Cognitive dissonance is based on mental discordance of something happening contrary to the way it is supposed to happen. Leon Festinger established through observation that though inconsistencies were common occurrences in life, they made people to have some sense of discomfort that drove them to correct the inconsistencies. The strength of the drive for corrective measures was also established to be proportional to the extent of inconsistency that was experienced by an individual. Thus, it can be argued that cognitive dissonance establishes the fact that people are not well receptive to inconsistencies, especially when such are aligned to the negative side (Cooper 5). Cognitive Dissonance Theory Leon Festinger who was active in the field of philosophy established and published the cognitive dissonance theory in the year 1957. His theory seemed to be simple and almost non substantial from the outset and was almost disregarded from its presentation. In the theory, Leon just expressed the fact that â€Å"people preferred consistency to inconsistency† (Cooper 6). The term cognition means knowledge that brings the notion of the theory to a mental capacity. This is particularly experienced when an individual is faced with conflicting interests. The state of dissonance can also be caused by an experience that is contrary to a person’s expectations, beliefs or even thoughts (Cooper 6). Development of the Theory The concept of cognitive dissonance gained much of its development following the establishment of Leon’s theory of cognitive dissonance. The theory that did not seem to be so distinct at the onset attracted reactions which initiated studies on the concept of cognitive dissonance.Advertising Looking for research paper on psychology? Let's see if we can help you! Get your first paper with 15% OFF Learn More Scholars who were driven by desires to disapprove the theory embarked on a move to gain a deeper understanding of the concepts and that increased the understanding of the concept of the theory thus made a rich contribution to the concept of cognitive dissonance. There were also those scholars who undertook to study the concept on the basis of gaining knowledge. Consequently, the result was a culmination into a wider spread and acceptance of the Leon’s cognitive dissonance theory. Individuals such as Irvin Janis and Milton were known for the opposing the cognitive dissonance theory. The criticisms presented by those who opposed the theory, however, came with proposals of contrary thoughts and presentations that further contributed to the wealth of the aspects of cognitive dissonance concepts. The ideology of cognitive dissonance has been an establishment that was fuelled by the theory formulated by Leon Festinger. The reactions that Leon’s theory enlisted established a basis for further developments that were realized in the philosophical school of cognitive dissonance. Cognitive dissonance has since then become a wide topic in psychology (Cooper 28). Concept of Cognitiv e Dissonance Cognitive dissonance has been recognized as a key element in the manner in which people behave. Studies have shown that people put in a lot of effort to help in the reduction or control of cognitive dissonance. The level of inconsistency in an individual’s thoughts is also identified to be related to personality factors. The degree of self dependence of individuals, for instance, relates to the possibility of encountering such inconsistencies as well as the manner in which an individual handles dissonance. People who are characterized by a high level of self independence are, for instance, less likely to encounter dissonance as compared to individuals who are dependent on other people and factors. This is because self independence or self reliance controls external forces that might influence or dictate an individual into cognitive dissonance. Interdependency on the contrary exposes people to a lot of factors and forces that in most cases drives people to conflic ts. The conflict may be with respect to two aspects: some two or more factors may pose a conflicting situation to an individual or an issue may be in conflict with an individual’s ideologies. A person can be faced with two external factors that are completely opposite in terms of their ideological applications. Under such a circumstance, an individual will be in conflict over the handling of the conflicting issue; which one to be resolved and which one to be compromised. A conflict similarly arises when a circumstance poses a conflicting ideology to an individual’s personality. In this case, an individual is forced to be in a situation that he or she believes is contrary to his or her established character (Kim 72).Advertising We will write a custom research paper sample on Cognitive Dissonance specifically for you for only $16.05 $11/page Learn More The response to cognitive dissonance is also influenced, to a great extent, by personality with respect to self dependence. Though individuals who are open to their environment are more susceptible to cognitive conflicts, their exposure to the environment gives them an advantage of approach to dealing with such conflicts. This group can therefore easily deal with arising conflicts to eliminate disturbances. Self concealed individuals are on the contrary less exposed to cognitive dissonance and at the same time weak in handling such issues when they arise. The trend developed by individuals who are not very independent on their environment, in adjusting to their environmental needs as well as solving collective problems around them plays an important role in shaping reactions to cognitive dissonance. Events of dissonance yield attempts by individuals to rise and overcome the posed conflict. Whether in cases of independent individuals or cases that involve individuals with extensive attachments to their environments, the capacity to resolve cognitive dissonance depends on a number of other factors. Factors such as â€Å"needs, desires and goals† and the drive to achieve these factors forms some of the basis of response to cognitive dissonance (Kim 73). When faced with a cognitive dissonance, individuals are forced into attitudes that are contrary to their normal behavior. The circumstance causing the dissonance establishes an imbalance between an individual’s immediate emotions and the inner behavior. A response that is the solution to the conflict is then the attempt to realign an individual’s feelings to the inner being. There are a variety of approaches that individuals employ in their attempts to make resolutions. Consolation has been one of the approaches that individuals use as a means to reconcile themselves with dissenting emotions. An individual who, for instance, receives a benefit out of circumstance leading to the dissonance would, for example, have his or her consolation on the benefits. An individual who does not ga in from an event that leads to the particular dissonance can on the other hand resort to change of emotions as a resolution to their discrepancy between their attitude and their behavior. A case consideration of involvement in criminal activity such as robbery can illustrate the case. An individual who ventures in a robbery exercise and succeeds in stealing a lot of money may not be at ease after the incident but will have the consolation of the money obtained from such activity. A failure to undertake the robbery may leave the same individual with no option other than running away from thoughts of the act as a consolation. This is particularly the case when the individual is somehow remorseful over the activity.Advertising Looking for research paper on psychology? Let's see if we can help you! Get your first paper with 15% OFF Learn More Generally, the move to resolve dissonance involves making sure that the discrepancies between behavior and attitude are reduced or even completely eliminated. There are four basic ways of handling inconsistencies. The first approach is for an individual to change their attitude so as to align it with behavior. Under this approach, the individual can be said to regret the circumstance that led to the inconsistency and is principled to personality. The inconsistency is thus accepted and attitudes transformed from the dissonance into the person’s normal behavior. The approach is more of preservative to an individual’s behavior (Nevid 288). Alternatively, an individual can resort to transforming his or her behavior in order to match that of the induced attitude. In this approach, the individual can be seen as being inclined to the cause of the dissonance. The transformation of an individual’s behavior towards an induced attitude can be due to a number of reasons: th e first reason that can explain this approach is emotional weakness that cannot allow the individual to withstand a transformation. Extreme level of such weakness may lead to loss of self control with the individual being controlled by emotions. A person will then yield to the causes of dissonance with the solution of incorporating such circumstances into his/her life and character. In the case example of a robber above, an individual will under this approach change his or her behavior to accepting the crime. This approach has the effect of transforming a person to new actions towards environmental circumstances. Another approach involves an individual’s provision of reasons for the difference between behavior and attitude. Once a convincing explanation is arrived at, there will be an induced perception of solution to the conflict. The reason may be consolations to bring the behavior in terms with the attitude while the cause of the conflict is left untouched. The approach ca n then be seen as an attempted incorporation of the first two approaches while the event leading to the dissonance remains untouched. It is therefore more of a cover up to the cognitive conflict than a solution. The last approach is a dismissive one of assuming that the conflict does not exist. The individual in conflict will under this approach maintain the status quo of exposure to the source of conflict while at the same time continues to suffer from the effects of such conflicts. A case example of cognitive dissonance in a person who smokes will therefore entail the admission to dangers of smoking which can lead to an individual stopping smoking so as to align his/her behavior with the conviction, change the attitude that smoking is not dangerous and maintain the behavior of smoking, dismiss the conflict on the perception that smoking is not the only source of danger thereby holding to both behavior and attitude or just dismiss any thoughts of the dangers of smoking and continue with the practice. Jeffrey explained that the most important concept of cognitive dissonance was the justification of the effort that was associated with the event in conflict. Jeffrey argued that the level of value attributed to an event was normally associated with the level of effort that was put into the event. Extensive efforts that are employed by an individual to solve cognitive dissonance with respect to aligning behavior and attitudes may then offer them a higher value in the society more than that of offering explanations to sources of the cognitive conflicts or just totally ignoring the conflict (Nevid 288). Vicarious Cognitive Dissonance Cognitive dissonance can also be induced in an individual by actions of other parties. When a person in a society witnesses another member undergoing cognitive dissonance, a reaction may be induced in the observer such that emotions are stirred up in the observer as if he/she (the observer) was the one undergoing the observed action. Th e concept of vicarious dissonance rises from the fact that no individual can be completely independent in any given set up. For each and every individual person, there exists an attachment to the society which as a result leads to social influence. The influence could either be directed from the individual to the society or from the society to the individual. An induced concept in a society will, for example, call for varied response by members of such a society. Researches carried out on social groups extensively revealed that a level of dissonance that was exhibited by an individual in a community had a high chance of causing dissonance in other members of the same group. Such studies are historically established; the first of such studies was carried out in the first half off the twentieth century and was on a religious group that believed that the world was to end (Forgas, Cooper and Crano 127). Vicarious cognitive dissonance is also significantly explained by the concept of soc ial identity. Forgas and his co authors established the fact that social identity â€Å"depersonalized self conception and transformed one’s own perception, beliefs, attitudes, feelings and behaviors† (Forgas, Cooper and Crano 127). Social identity makes it possible for an individual to experience cognitive dissonance without necessarily being exposed to the causative agents. Social identity also has the potential to transform an individual through assimilation of the individual. A person possessing particular traits can be naturally assimilated when the individual is exposed to particular practices in the society. Such assimilative moves can drive an individual to transformations that are a result of cognitive dissonance that never affected the individual. Influence of a society on its individual members to adopt a variation in character is another direct concept of vicarious cognitive dissonance. Apart from having the freedom to transform into practices of a tolerant society, there are instances where an individual is forced to transform his or her attitude to be in line with those that are required by the society. Under all these cases, an individual is forced into a transformation that is not a result of a personal act leading to cognitive dissonance (Forgas, Cooper and Crano 128). It was established that vicarious cognitive dissonance was induced in ways that were quiet different from what caused direct dissonance. While direct dissonance was attributed to personal encounters, vicarious cognitive dissonance was based on an individual’s emotions with respect to another person. The perception that a victim suffers from cognitive dissonance plays a significant role in shaping people’s behavior or attitudes. Researches have revealed that vicarious cognitive dissonance was primarily based on empathy rather than fear. People are not influenced by experiences of others on the basis of dangers or negative experiences but on emotional a ttachment to the experience involved. Even though negative impacts of events affect the degree of vicarious dissonance, it does so through influencing empathy (Forgas and Williams 337). Conclusion Studies have been carried out to understand human behavior. One such behavior has been discussed in this article in lengthy. It has been shown that human beings naturally tend to avoid uncomfortable situations such as conflicting situations whereby there is a need for one decision to be made. Cognitive dissonance is an occurrence of conflict of interest in an individual’s thoughts. The dissonance is induced by an occurrence to or about an individual that is characterized with compromise of character. Responses to dissonance can have the effect of resolving the conflict through a variety of transformational measures. Cognitive dissonance can also be acquired vicariously. Works Cited Cooper, Joel. Cognitive dissonance: fifty years of a classic theory. London, UK: SAGE, 2007. Print. Fo rgas, Joseph and Williams, Kipling. The psychology of attitudes and attitude change. New York, NY: Routledge, 2010. Print. Forgas, Joseph., Cooper, Joel and Crano, William. The Social Self: Cognitive, Interpersonal and Intergroup Perspectives. New York, NY: Psychology Press, 2003. Print. Kim, Min. Non-western perspectives on human communication: implications for theory and practice. London, UK: SAGE, 2002. Print. Nevid, Jeffrey. Psychology: Concepts and Applications. Boston, MA: Cengage Learning, 2008. Print. This research paper on Cognitive Dissonance was written and submitted by user Payten G. to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.

Aaron Burr essays

Aaron Burr essays Aaron Burr was a brilliant man who made numerous contributions to the American Revolution and also led a prosperous life of the battlefield. Aaron Burr was born February 6, 1756 in Newark, New Jersey, he lead a tough child hood, but was still able to receive a great education and make something of it. He was a good soldier who fought hard and accomplished much in the American Revolution. After the war he lived to make even more out of his life. On February 6, 1756 Aaron Burr was born in Newark, New Jersey. Shortly after his birth his sister, Sally Burr was brought into the world. Aaron Burr was the son of Reverend Aaron Burr who was the cofounder and second president of the College of New Jersey (now Princeton University), and Esther Edwards. Both parents died before he was three years old. After his parents death Aaron went to live with his uncle, Reverend Timothy Edwards. In his youth Aaron constantly rebelled against authority. He escaped the strict discipline of his uncles home to enter Princeton as a sophomore in 1769 at the young age of 13. Graduating with honors in 1772, he studied theology and then abandoned it for law. In July of 1775 Matthias Ogden at Cambridge, near Boston, accompanied Burr. Things there were to quiet to suit two adventurous lads like Burr and Ogden, So when they learned that Colonel Benedict Arnold was heading an expedition against Quebec, Burr was quick to volunteer. Aaron Burr first served on Benedict Arnolds Staff, where he was quickly promoted to captain. He then served briefly with George Washington, and later with Gen. Israel Putman. In July 1777, as a lieutenant colonel, Burr took over command of a regiment. In June of 1778 Colonel Burr led his regiment in the Battle of Monmouth, which proved unfortunate for the American forces. Burr was very active in the battle and suffered slight sunstroke. In January of 1779 Burr was transferred to ...

Insurance Risk Securilization Thesis Example | Topics and Well Written Essays - 2500 words

Insurance Risk Securilization - Thesis Example The insured part of the contract is to promise to pay an amount of money, known as the premium, either once or regular intervals." "Insurance is a device to share the financial losses which might befall on an individual or his family on the happening of special event" (Kaur n.d. p.4). The event can be death of a bread-winner to the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance and other certain events in general insurance, e.g, theft in burglary insurance, accident in motor insurance, etc. These events may occur any time within the insured period. The insurer has to provide a fixed amount or indemnify the amount of occurred due to the insured perils. Hence, insurers bear a great risk of paying huge amount of fund at any time if the insured peril is occurred. As large as the insured amount and the probability of happening insured peril, the Insurance Risk for insurers is large. Reinsurance is an arrangement whereby an original insurer who has insured a risk insures a part of that risk again with another insurer, that is to say, reinsures a part of the risk in order to diminish his own liability. ... The policyholder is usually not aware that reinsurance has been arranged as no mention is made of it on the policy." Advantages of Reinsurance 1. The original insurer can accept the risk to the extent of his limit. In absence of reinsurance, a person desiring a large amount of insurance will have to take a number of policies from several insurers. The reinsurance contract makes it possible to purchase only one policy from an insurer. 2. Reinsurance makes it possible to accept each risk for the very amount desired by the proposer and to transfer the excess above the 'retention limit' to another insurer. 3. The reinsurance gives the benefit of the greater stability resulting from a widespread of business. By accepting many risks and scaling down, by reinsurance, all those that are larger than the normal carrying capacity of the insurer justifies, certainly in business is substituted for uncertainty through the better application of the law of average. 4. The insurance makes stability in underwriting and consistency in underwriting results over a period. 5. It provides a safeguard against serious effects of conflagration. 6. The reinsurance has the effect of stabilizing income and losses over a period of years. Capital Market The capital markets consist of the markets in which the intermediate and long-term securities of individuals, business firms, and governmental units are issued and traded. Capital markets are frequently subdivided into three parts-the bond market, the mortgage market, and the stock market. On the other word, capital market is the market where "long-term capital is raised by industry and commerce, the government, and local authorities" (Barclays Capital-Campus Recruitment, n.d.). The Glossary of Capital Market states that