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COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis

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  • Shinsuke Ikeda
  • Eiji Yamamura
  • Yoshiro Tsutsui

Abstract

Based on unique panel data from a five-wave internet survey in Japan, we show how the coronavirus disease 2019 (COVID-19) pandemic affects people’s prospect-theory risk preferences, especially in the loss domain. The panel analysis indicates that following the spread of the pandemic, diminishing sensitivity becomes stronger for the participants’ value and probability weighting functions. Therefore, owing to the pandemic, (i) people become less sensitive to an increase in losses and feel less displeasure owing to losses, especially large ones, and (ii) they become more pessimistic toward losses occurring with tiny probabilities, and more optimistic toward losses with larger probabilities. One implication of the study is that people become less cautious about the risks of suffering large losses with non-tiny probabilities, which may slow down the recovery of society.

Suggested Citation

  • Shinsuke Ikeda & Eiji Yamamura & Yoshiro Tsutsui, 2023. "COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis," Review of Behavioral Economics, now publishers, vol. 10(4), pages 287-313, November.
    • Handle: RePEc:now:jnlrbe:105.00000178
    DOI: 10.1561/105.00000178
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    Cited by:

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    2. Andreas C. Drichoutis & Rodolfo M. Nayga, 2022. "On the stability of risk and time preferences amid the COVID-19 pandemic," Experimental Economics, Springer;Economic Science Association, vol. 25(3), pages 759-794, June.

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