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Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster

Author

Listed:
  • Lionel Page
  • David A. Savage
  • Benno Torgler

Abstract

This study explores people’s risk attitudes 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 of the adoption of a risk-seeking attitude after a loss.

Suggested Citation

  • Lionel Page & David A. Savage & Benno Torgler, 2012. "Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster," CESifo Working Paper Series 3878, CESifo.
    • Handle: RePEc:ces:ceswps:_3878
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Yawen Jiang & Weiyi Ni, 2019. "Risk selection into supplemental private health insurance in China," Health Economics Review, Springer, vol. 9(1), pages 1-11, December.
    2. Sommarat Chantarat & Sirikarn Lertamphainont & Krislert Samphantharak, 2016. "Floods and Farmers: Evidence from the Field in Thailand," PIER Discussion Papers 40., Puey Ungphakorn Institute for Economic Research, revised Aug 2016.
    3. Chantarat, Sommarat & Oum, Sothea & Samphantharak, Krislert & Sann, Vathana, 2019. "Natural Disasters, Preferences, and Behaviors: Evidence from the 2011 Mega Flood in Cambodia," Journal of Asian Economics, Elsevier, vol. 63(C), pages 44-74.
    4. Farah Said & Uzma Afzal & Ginger Turner, 2014. "Attitudes Towards Risk in the Wake of a Rare Event: Evidence from Pakistan," CREB Working papers 2-2014, Centre for Research in Economics and Business, The Lahore School of Economics, revised 2014.
    5. Said, Farah & Afzal, Uzma & Turner, Ginger, 2015. "Risk taking and risk learning after a rare event: Evidence from a field experiment in Pakistan," Journal of Economic Behavior & Organization, Elsevier, vol. 118(C), pages 167-183.
    6. Luigi Guiso, 2014. "Risk Aversion and Financial Crisis," EIEF Working Papers Series 1412, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2014.

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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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