Disasters and Risk Perception: Evidence from Thailand Floods

This paper examines if and how past experience affects people's perception towards disasters. In particular, we study if past experience enables people to form a probabilistic belief as opposed to ambiguity or unawareness, i.e., Knightian uncertainty. To answer the question, we use a unique micro data set of firms operating in Thailand, which includes firms that incurred losses during the 2011 Thailand floods as well as those that did not. The empirical evidence indicates that firms with direct loss experience are more likely to form a probabilistic belief compared to those without one. In contrast, subjective probabilities across firms are very diverse regardless of loss experience. This suggests that the level or scale of the prevention measures firms or people would deploy on a voluntary basis would be diverse and that arranging a widely subscribed formal catastrophe insurance scheme targeting a specific catastrophe peril would be very difficult.