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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 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 oods (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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Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2012-07.

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Date of creation: Jun 2012
Handle: RePEc:cra:wpaper:2012-07
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