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Dynamic Endogenous Risks & Non-Expected Utility Behavior

Author

Listed:
  • Ram Ranjan

    (Macquarie University)

  • Jason F. Shogren

    (University of Wyoming)

Abstract

The theory of endogenous risk captures the idea that people self-protect and self-insure to reduce risks to human and environmental health. Herein we extend the standard static model to include the realities of (1) dynamic and multiple risks, and (2) non-expected utility (non-EU) behavior. Our results suggest both self-protection and self-insurance decrease for any one risk when cumulative dynamic risks are large and when multiple risks exist. If people are non-EU maximizers, self-protection and self-insurance also decline when they follow the conservatism heuristic (insufficient weighting of new information). In addition, if non-EU people over- and under-weight probabilities of bad states, they can invest non-linearly in self-protection and self-insurance.

Suggested Citation

  • Ram Ranjan & Jason F. Shogren, 2009. "Dynamic Endogenous Risks & Non-Expected Utility Behavior," Korean Economic Review, Korean Economic Association, vol. 25, pages 215-240.
    • Handle: RePEc:kea:keappr:ker-20091231-25-2-02
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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-20091231-25-2-02.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kandulu, John M. & Bryan, Brett A. & King, Darran & Connor, Jeffery D., 2012. "Mitigating economic risk from climate variability in rain-fed agriculture through enterprise mix diversification," Ecological Economics, Elsevier, vol. 79(C), pages 105-112.

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    More about this item

    Keywords

    Self-insurance; Self-Protection; Perception; Probability Weighting; Risk Resilience;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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