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Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster

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  • Lionel Page

    (Queensland University of Technology)

  • David Savage

    (Queensland University of Technology)

  • Benno Torgler

    (Queensland University of Technology)

Abstract

This study explores people's risk attitudes after having suffered large real-world losses following a natural disaster. Using the margins of the 2011 Australian floods (Brisbane) as a natural experimental setting, we find that homeowners who were victims of the floods and face large losses in property values are 50% more likely to opt for a risky gamble {a scratch card giving a small chance of a large gain ($500,000) {than for a sure amount of comparable value ($10). This finding is consistent with prospect theory predictions of the adoption of a risk-seeking attitude after a loss.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2012.54.

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Date of creation: Jul 2012
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Handle: RePEc:fem:femwpa:2012.54

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Keywords: Decision under Risk; Large Losses; Natural Experiment;

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  1. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
  2. Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers 2011_10, Durham University Business School.
  3. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, 03.
  4. Lisa Cameron & Manisha Shah, 2013. "Risk-Taking Behavior in the Wake of Natural Disasters," NBER Working Papers 19534, National Bureau of Economic Research, Inc.
  5. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  6. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  7. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
  8. Nathalie Etchart-Vincent & Olivier l’Haridon, 2011. "Monetary incentives in the loss domain and behavior toward risk: An experimental comparison of three reward schemes including real losses," Journal of Risk and Uncertainty, Springer, vol. 42(1), pages 61-83, February.
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