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Evolution of subjective hurricane risk perceptions: A Bayesian approach

  • Kelly, David L.
  • Letson, David
  • Nelson, Forrest
  • Nolan, David S.
  • Solís, Daniel

How do decision makers weight private and official information sources which are correlated and differ in accuracy and bias? This paper studies how traders update subjective risk perceptions after receiving expert opinions, using a unique data set from a prediction market, the Hurricane Futures Market (HFM). We derive a theoretical Bayesian framework which predicts how traders update the probability of a hurricane making landfall in a certain range of coastline, after receiving correlated track forecast information from official and unofficial sources. Our results suggest that traders behave in a way not inconsistent with Bayesian updating but this behavior is based on the perceived quality of the information received. Official information sources are discounted when a perception of bias and credible alternatives exist.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 81 (2012)
Issue (Month): 2 ()
Pages: 644-663

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Handle: RePEc:eee:jeborg:v:81:y:2012:i:2:p:644-663
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
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