Embedding a Field Experiment in Contingent Valuation to Measure Context-Dependent Risk Preferences: Does Prospect Theory Explain Individual Responses for Wildfire Risk?
AbstractThis paper contributes towards the development of an empirical approach applicable to contingent valuation to accommodate non-expected utility risk preferences. Combining elicitation approaches used in field experiments with contingent valuation, we embed an experimental design that systematically varies probabilities and losses across a survey sample in a willingness to pay elicitation format. We apply the proposed elicitation and estimation approaches to estimate the risk preferences of a representative homeowner who faces probabilistic wildfire risks and an investment option that reduces losses due to wildfire. Based on prospect theory, we estimate parameters of probability weighting, risk preferences and use individual characteristics as covariates for these parameters and as utility shifters. We find that risk preferences are consistent with prospect theory. We find that probability weighting may offer an explanation for respondents’ observed under investment in measures to reduce losses due to wildfire.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics in its series Working Papers with number 10-003.
Length: 34 pages
Date of creation: May 2010
Date of revision:
Prospect theory; Contingent valuation; Field experiment; Wildfire risk;
Find related papers by JEL classification:
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-18 (All new papers)
- NEP-CBE-2010-06-18 (Cognitive & Behavioural Economics)
- NEP-EXP-2010-06-18 (Experimental Economics)
- NEP-IAS-2010-06-18 (Insurance Economics)
- NEP-UPT-2010-06-18 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David M. Bruner, 2009.
"Changing the Probability versus Changing the Reward,"
09-04, Department of Economics, Appalachian State University.
- David Bruner, 2009. "Changing the probability versus changing the reward," Experimental Economics, Springer, vol. 12(4), pages 367-385, December.
- Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
- John Hey & Andrea Morone & Ulrich Schmidt, 2009.
"Noise and bias in eliciting preferences,"
Journal of Risk and Uncertainty,
Springer, vol. 39(3), pages 213-235, December.
- John D Hey & Andrea Morone & Ulrich Schmidt, 2007. "Noise and Bias in Eliciting Preferences," Discussion Papers 07/04, Department of Economics, University of York.
- John D. Hey & Andrea Morone & Ulrich Schmidt, 2007. "Noise and Bias in Eliciting Preferences," Kiel Working Papers 1386, Kiel Institute for the World Economy.
- Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
- Jindapon, Paan & Shaw, W. Douglass, 2008. "Option price without expected utility," Economics Letters, Elsevier, vol. 100(3), pages 408-410, September.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer, vol. 12(2), pages 133-158, June.
- Nguyen, Quang & Leung, PingSun, 2009. "Do Fishermen Have Different Attitudes Toward Risk? An Application of Prospect Theory to the Study of Vietnamese Fishermen," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(3), December.
- Wilcox, Nathaniel T., 2011.
"'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk,"
Journal of Econometrics,
Elsevier, vol. 162(1), pages 89-104, May.
- Wilcox, Nathaniel, 2007. "Stochastically more risk averse: A contextual theory of stochastic discrete choice under risk," MPRA Paper 11851, University Library of Munich, Germany.
- Mary Riddel & W. Shaw, 2006. "A theoretically-consistent empirical model of non-expected utility: An application to nuclear-waste transport," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 131-150, March.
- Shafran, Aric P., 2008. "Risk externalities and the problem of wildfire risk," Journal of Urban Economics, Elsevier, vol. 64(2), pages 488-495, September.
- Kobayashi, Mimako & Zirogiannis, Nikolaos & Rollins, Kimberly S. & Evans, M.D.R., 2010. "Estimating Private Incentives for Wildfire Risk Mitigation: Determinants of Demands for Different Fire-Safe Actions," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61867, Agricultural and Applied Economics Association.
- Mariam Lankoande & Jonathan Yoder, 2006.
"An Econometric Model of Wildfire Suppression Productivity,"
2006-10, School of Economic Sciences, Washington State University.
- Jonathan Yoder & Mariam Lankoande, 2006. "An Econometric Model of Wildfire Suppression Productivity," Working Papers 2006-10, School of Economic Sciences, Washington State University.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mehmet Tosun).
If references are entirely missing, you can add them using this form.