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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 pandemic affected people’s prospect-theory risk preferences, especially in the loss domain. The panel analysis indicates that with the spread of the pandemic, diminishing sensitivity becomes stronger for the participants’ value and probability weighting functions. Thus, due to the pandemic, (i) people become less sensitive to an increase in losses and feel less pain due to losses, especially large ones; and (ii) they become more pessimistic towards tail loss risks, and more optimistic towards non-tail loss risks. One implication is that people have become less cautious of the risks of suffering large non-tail losses, which might retard the recovery of society.

Suggested Citation

  • Shinsuke Ikeda & Eiji Yamamura & Yoshiro Tsutsui, 2020. "COVID-19 Enhanced Diminishing Sensitivity in Prospect-Theory Risk Preferences: A Panel Analysis," ISER Discussion Paper 1106, Institute of Social and Economic Research, The University of Osaka.
    • Handle: RePEc:dpr:wpaper:1106
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    1. 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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