Insurance policies with deductibles could to some extend alleviate moral hazard and adverse selection problems under asymmetric information. However, in the crop insurance market farmers tend to prefer insurance policies with high deductibles. This paper stated asymmetric information problem in crop insurance markets through classical literature reviews, and pointed out the effect of insurance policies with deductibles on eliminating asymmetric information problems. Then the paper explained this behavior of farmers from the perspective of behavioral finance using stimulation model of prospect theory. It concludes that farmers regard crop insurance as an investment, and store it in different mental accounting from agricultural production mental accounting, outweighing crop insurance premium versus converge and expected value of crop insurance investment combined all together explain the unique preference of high deductible insurance policies.

Keywords: Prospect Theory; Value Function; Weighting Function; Loss Aversion