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

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  • Page, Lionel
  • Savage, David A.
  • Torgler, Benno

Abstract

This study explores people׳s risk taking behaviour 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 regarding the adoption of a risk-seeking attitude after a loss.

Suggested Citation

  • Page, Lionel & Savage, David A. & Torgler, Benno, 2014. "Variation in risk seeking behaviour following large losses: A natural experiment," European Economic Review, Elsevier, vol. 71(C), pages 121-131.
    • Handle: RePEc:eee:eecrev:v:71:y:2014:i:c:p:121-131
    DOI: 10.1016/j.euroecorev.2014.04.009
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    More about this item

    Keywords

    Decision under risk; Large losses; Natural experiment;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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