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

Listed author(s):
  • Lionel Page
  • David A. Savage
  • Benno Torgler

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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-07/cesifo1_wp3878.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3878.

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Date of creation: 2012
Handle: RePEc:ces:ceswps:_3878
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