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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

    (Queensland University of Technology)

  • David Savage

    (Queensland University of Technology)

  • Benno Torgler

    (Queensland University of Technology)

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 Savage & Benno Torgler, 2012. "Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster," Working Papers 2012.54, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2012.54
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    References listed on IDEAS

    as
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    Cited by:

    1. Savage David A., 2016. "Surviving the Storm: Behavioural Economics in the Conflict Environment," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 22(2), pages 105-129, April.
    2. repec:eee:deveco:v:131:y:2018:i:c:p:15-27 is not listed on IDEAS
    3. Holden , Stein, 2014. "Risky Choices of Poor People: Comparing Risk Preference Elicitation Approaches in Field Experiments," CLTS Working Papers 10/14, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    4. Luigi Guiso, 2014. "Risk Aversion and Financial Crisis," EIEF Working Papers Series 1412, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2014.
    5. 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.
    6. repec:eee:wdevel:v:104:y:2018:i:c:p:310-325 is not listed on IDEAS
    7. Paul Frijters & Benno Torgler & Darshana Rajapaksa & Clevo Wilson & Shunsuke Managi & Vincent Hoang & Boon Lee, 2016. "Flood Risk Information, Actual Floods and Property Values: A Quasi-Experimental Analysis," The Economic Record, The Economic Society of Australia, vol. 92, pages 52-67, June.
    8. Berlemann, Michael & Steinhardt, Max F. & Tutt, Jascha, 2015. "Do Natural Disasters Stimulate Individual Saving? Evidence from a Natural Experiment in a Highly Developed Country," IZA Discussion Papers 9026, Institute for the Study of Labor (IZA).
    9. repec:kap:expeco:v:20:y:2017:i:3:d:10.1007_s10683-016-9509-9 is not listed on IDEAS
    10. Michal W. Krawczyk & Stefan T. Trautmann & Gijs Kuilen, 2017. "Catastrophic risk: social influences on insurance decisions," Theory and Decision, Springer, vol. 82(3), pages 309-326, March.
    11. 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.
    12. Kevin Luo & Tomoko Kinugasa, 2018. "Do natural disasters influence long-term saving?: Assessing the impact of the 2008 Sichuan earthquake on household saving rates using synthetic control," Discussion Papers 1804, Graduate School of Economics, Kobe University.
    13. Chuang, Yating & Schechter, Laura, 2015. "Stability of experimental and survey measures of risk, time, and social preferences: A review and some new results," Journal of Development Economics, Elsevier, vol. 117(C), pages 151-170.
    14. Maximilian Rüdisser & Raphael Flepp & Egon Franck, 2017. "Do casinos pay their customers to become risk-averse? Revising the house money effect in a field experiment," Experimental Economics, Springer;Economic Science Association, vol. 20(3), pages 736-754, September.
    15. Hallegatte,Stephane & Bangalore,Mook & Jouanjean,Marie Agnes, 2016. "Higher losses and slower development in the absence of disaster risk management investments," Policy Research Working Paper Series 7632, The World Bank.
    16. Kahsay, Goytom Abraha & Osberghaus, Daniel, 2016. "Extreme weather and risk preference: Panel evidence from Germany," ZEW Discussion Papers 16-032, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    17. Victor STEPHANE, 2016. "How Do Natural Disasters Affect Saving Behavior?," Working Papers 201621, CERDI.
    18. Sommarat Chantarat & Sothea Oum & Krislert Samphantharak & Vathana Sann, 2016. "Natural Disasters, Preferences, and Behaviors: Evidence from the 2011 Mega Flood in Cambodia," PIER Discussion Papers 38., Puey Ungphakorn Institute for Economic Research, revised Jul 2016.

    More about this item

    Keywords

    Decision under Risk; Large Losses; Natural Experiment;

    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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