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

  • Lionel Page

    (Queensland University of Technology)

  • David Savage

    (Queensland University of Technology)

  • Benno Torgler

    (Queensland University of Technology)

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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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2012.54.

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Date of creation: Jul 2012
Date of revision:
Handle: RePEc:fem:femwpa:2012.54
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