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When Risk Perception Gets in the Way: Probability Weighting and Underprevention

Author

Listed:
  • Aurélien Baillon

    (Erasmus School of Economics, Erasmus University Rotterdam, 3062 PA Rotterdam, Netherlands)

  • Han Bleichrodt

    (Erasmus School of Economics, Erasmus University Rotterdam, 3062 PA Rotterdam, Netherlands; Research School of Economics, Australian National University, ACT 0200 Canberra, Australia)

  • Aysil Emirmahmutoglu

    (Department of Business and Management Science, NHH Norwegian School of Economics, 5045 Bergen, Norway)

  • Johannes Jaspersen

    (Munich Risk and Insurance Center (MRIC), LMU Munich, 80539 Munich, Germany)

  • Richard Peter

    (Department of Finance, University of Iowa, Iowa City, Iowa 52242)

Abstract

Personal decisions about health hazards are the main cause of impaired health and premature death. People smoke and eat too much, and they exercise too little. The lack of preventive efforts is surprising given their proven effectiveness. In the early 1960s, Arrow suggested that moral hazard might be a reason for underprevention, but this explanation was later challenged. In this paper, we show that underprevention might be caused by misperceived probabilities. We derive when and how probability weighting gets in the way of prevention by blurring its benefits. We use a general model of prevention, encompassing several special cases from the literature. We also show how perceived ambiguity makes the problem of underprevention even worse by amplifying the effect of probability weighting.

Suggested Citation

  • Aurélien Baillon & Han Bleichrodt & Aysil Emirmahmutoglu & Johannes Jaspersen & Richard Peter, 2022. "When Risk Perception Gets in the Way: Probability Weighting and Underprevention," Operations Research, INFORMS, vol. 70(3), pages 1371-1392, May.
    • Handle: RePEc:inm:oropre:v:70:y:2022:i:3:p:1371-1392
    DOI: 10.1287/opre.2019.1910
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    Cited by:

    1. Jan Gaska, 2023. "Losses from Fluvial Floods in Poland over the 21st Century – Estimation Using the Productivity Costs Method," Economics of Disasters and Climate Change, Springer, vol. 7(3), pages 357-383, November.
    2. Emmanuelle Augeraud-Véron & Marc Leandri, 2023. "Optimal self-protection and health risk perception: bridging the gap between risk theory and the Health Belief Model," EconomiX Working Papers 2023-12, University of Paris Nanterre, EconomiX.

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