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Failing to learn from experience about catastrophes: The case of hurricane preparedness

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  • Robert Meyer

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Abstract

This paper explores the question of whether there are inherent limits to our ability to learn from experience about the value of protection against low-probability, high-consequence, events. Findings are reported from two controlled experiments in which participants have a monetary incentive to learn from experience making investments to protect against hurricane risks. A central finding is that investments display a short-term forgetting effect consistent with the use of reinforcement learning rules, where a significant driver of investments in a given period is whether storm losses were incurred in the precious period. Given the relative rarity of such losses, this reinforcement process produces a mean investment level below that which would be optimal for most storm threats. Investments are also found to be insensitive to the censoring effect of protection itself, implying that the size of experienced losses—rather than losses that are avoided—is the primary driver of investment decisions. Copyright Springer Science+Business Media New York 2012

Suggested Citation

  • Robert Meyer, 2012. "Failing to learn from experience about catastrophes: The case of hurricane preparedness," Journal of Risk and Uncertainty, Springer, vol. 45(1), pages 25-50, August.
  • Handle: RePEc:kap:jrisku:v:45:y:2012:i:1:p:25-50
    DOI: 10.1007/s11166-012-9146-4
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    References listed on IDEAS

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    1. Kunreuther, Howard & Sanderson, Warren & Vetschera, Rudolf, 1985. "A behavioral model of the adoption of protective activities," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 1-15, March.
    2. Browne, Mark J & Hoyt, Robert E, 2000. "The Demand for Flood Insurance: Empirical Evidence," Journal of Risk and Uncertainty, Springer, vol. 20(3), pages 291-306, May.
    3. Kalai, Ehud & Lehrer, Ehud, 1993. "Rational Learning Leads to Nash Equilibrium," Econometrica, Econometric Society, vol. 61(5), pages 1019-1045, September.
    4. Aric Shafran, 2011. "Self-protection against repeated low probability risks," Journal of Risk and Uncertainty, Springer, vol. 42(3), pages 263-285, June.
    5. V. Smith & Jared Carbone & Jaren Pope & Daniel Hallstrom & Michael Darden, 2006. "Adjusting to natural disasters," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 37-54, September.
    6. Raghubir, Priya & Menon, Geeta, 1998. " AIDS and Me, Never the Twain Shall Meet: The Effects of Information Accessibility on Judgments of Risk and Advertising Effectiveness," Journal of Consumer Research, Oxford University Press, vol. 25(1), pages 52-63, June.
    7. Erwann O. Michel-Kerjan, 2010. "Catastrophe Economics: The National Flood Insurance Program," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 165-186, Fall.
    8. Viscusi, W Kip, 1979. "Insurance and Individual Incentives in Adaptive Contexts," Econometrica, Econometric Society, vol. 47(5), pages 1195-1207, September.
    9. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    10. Robin L. Dillon & Catherine H. Tinsley, 2008. "How Near-Misses Influence Decision Making Under Risk: A Missed Opportunity for Learning," Management Science, INFORMS, vol. 54(8), pages 1425-1440, August.
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    Citations

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    Cited by:

    1. Jan C. Ours & Ben Vollaard, 2016. "The Engine Immobiliser: A Non‐starter for Car Thieves," Economic Journal, Royal Economic Society, vol. 126(593), pages 1264-1291, June.
    2. Nicklisch, Andreas & Köke, Sonja & Lange, Andreas, 2016. "Is Adversity a School of Wisdom? Experimental Evidence on Cooperative Protection Against Stochastic Losses," Annual Conference 2016 (Augsburg): Demographic Change 145716, Verein für Socialpolitik / German Economic Association.
    3. repec:kap:jrisku:v:55:y:2017:i:1:d:10.1007_s11166-017-9263-1 is not listed on IDEAS
    4. repec:oup:jconrs:v:43:y:2016:i:3:p:478-496. is not listed on IDEAS
    5. Hohnisch, M. & Pittnauer, S. & Selten, R. & Pfingsten, A. & Eraßmy, J., 2014. "Gender differences in decisions under profound uncertainty are non-robust to the availability of information on equally informed others’ decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 40-58.

    More about this item

    Keywords

    Decision making under uncertainty; Learning from experience; Natural disasters; D8; D9; Q5;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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