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Risk-Taking Behavior in the Wake of Natural Disasters

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  • Cameron, Lisa A.

    ()
    (Monash University)

  • Shah, Manisha

    ()
    (University of California, Los Angeles)

Abstract

We study whether natural disasters affect risk-taking behavior exploiting geographic variation in exposure to natural disasters. We conduct standard risk games (using real money) with randomly selected individuals in Indonesia and find that individuals who recently suffered a flood or earthquake exhibit more risk aversion than individuals living in otherwise like villages. The impact persists for several years, particularly if the disaster was severe. Some, but not all, of this effect is due to income losses. While we cannot rule out fundamental changes in risk preferences, data on subjective beliefs of the probability of a disaster occurring and the expected severity of such a disaster suggest that changes in perceptions of background risk are driving the more risk-averse behavior we observe. We show that access to insurance can partly offset this effect. Finally, we relate the observed experimental behavior to the propensity of respondents to take risks in their daily lives and show that an increase in risk-aversion has important implications for economic development.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6756.

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Length: 51 pages
Date of creation: Jul 2012
Date of revision:
Publication status: forthcoming in: Journal of Human Resources
Handle: RePEc:iza:izadps:dp6756

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Keywords: risk aversion; natural disasters; development;

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References

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Cited by:
  1. Leonardo Becchetti & Stefano Castriota & Pierluigi Conzo, 2012. "Calamity, Aid and Indirect Reciprocity: the Long Run Impact of Tsunami on Altruism," CEIS Research Paper 239, Tor Vergata University, CEIS, revised 06 Jul 2012.
  2. Lionel Page & David Savage & Benno Torgler, 2012. "Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster," Working Papers 2012.54, Fondazione Eni Enrico Mattei.
  3. Vieider, Ferdinand M. & Chmura, Thorsten & Martinsson, Peter, 2012. "Risk attitudes, development, and growth: Macroeconomic evidence from experiments in 30 countries," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-401, Social Science Research Center Berlin (WZB).
  4. Anh Duc Dang, 2012. "Cooperation makes beliefs: Weather variation and sources of social trust in Vietnam," ANU Working Papers in Economics and Econometrics 2012-596, Australian National University, College of Business and Economics, School of Economics.
  5. Mohamed Ali Bchir & Marc Willinger, 2013. "Does the exposure to natural hazards affect risk and time preferences? Some insights from a field experiment in Perú," Working Papers 13-04, LAMETA, Universtiy of Montpellier, revised Mar 2013.
  6. Alain Cohn & Jan Engelmann & Ernst Fehr & Michel Maréchal, 2013. "Evidence for countercyclical risk aversion: an experiment with financial professionals," UBSCENTER - Working Papers 004, UBS International Center of Economics in Society - Department of Economics - University of Zurich.
  7. Lionel Page & David A. Savage & Benno Torgler, 2013. "Variation in risk seeking behavior following large losses: A natural experiment," QuBE Working Papers 007, QUT Business School.
  8. Anh Duc Dang, 2012. "On the Sources of Risk Preferences in Rural Vietnam," ANU Working Papers in Economics and Econometrics 2012-593, Australian National University, College of Business and Economics, School of Economics.
  9. Sanjaya, Muhammad Ryan, 2013. "On the source of risk aversion in Indonesia using micro data 2007," Economics Discussion Papers 2013-33, Kiel Institute for the World Economy.
  10. Alessandro Bucciol & Luca Zarri, 2013. "Financial Risk Aversion and Personal Life History," Working Papers 05/2013, University of Verona, Department of Economics.
  11. Trautmann, S.T. & Kuilen, G. van de, 2011. "Belief Elicitation: A Horse Race among Truth Serums," Discussion Paper 2011-117, Tilburg University, Center for Economic Research.
  12. Pierluigi Conzo, 2014. "Trust and Cheating in Sri Lanka: The Role of Experimentally-Induced Emotions about Tsunam," CSEF Working Papers 355, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  13. Necker, Sarah & Ziegelmeyer, Michael, 2014. "Household Risk Taking after the Financial Crisis," MEA discussion paper series 14279, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  14. Bruno Martorano & Sudhanshu Handa & Carolyn Halpern & Harsha Thirumurthy & UNICEF Innocenti Research Centre, 2014. "Subjective Well-being, Risk Perceptions and Time Discounting: Evidence from a large-scale cash transfer programme," Innocenti Working Papers inwopa717, UNICEF Innocenti Research Centre.
  15. Treffers, T. & Koellinger, Ph.D. & Picot, A.O., 2012. "In the Mood for Risk? A Random-Assignment Experiment Addressing the Effects of Moods on Risk Preferences," ERIM Report Series Research in Management ERS-2012-014-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  16. Menéndez, Marta & Gignoux, Jérémie, 2012. "Critical periods and the long-run effects of income shocks on education: evidence from Indonesia," Economics Papers from University Paris Dauphine 123456789/6637, Paris Dauphine University.
  17. Marc Willinger & Mohamed Ali Bchir & Carine Heitz, 2013. "Risk and time preferences under the threat of background risk: a case-study of lahars risk in central Java," Working Papers 13-08, LAMETA, Universtiy of Montpellier, revised May 2013.
  18. repec:dgr:eureri:1765037344 is not listed on IDEAS
  19. Ginger Turner & Farah Said & Uzma Afzal, 2014. "Microinsurance Demand After a Rare Flood Event: Evidence From a Field Experiment in Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 39(2), pages 201-223, April.

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