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Variation in risk seeking behavior following large losses: A natural experiment

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Author Info

  • Lionel Page
  • David A. Savage
  • Benno Torgler

Abstract

This study explores people's risk attitudes after having suff ered 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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File URL: http://external-apps.qut.edu.au/business/documents/QuBEWorkingPapers/2013/Flood_PST.pdf
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Bibliographic Info

Paper provided by QUT Business School in its series QuBE Working Papers with number 007.

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Date of creation: 14 Mar 2013
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Handle: RePEc:qut:qubewp:wp007

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Web page: http://www.qut.edu.au/research/research-projects/queensland-behavioural-economics-group-qube

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Keywords: Decision under risk; large losses; natural experiment;

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References

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