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Evolution of Subjective Hurricane Risk Perceptions: A Bayesian Approach

Author

Listed:
  • David Kelly

    () (Department of Economics, University of Miami)

  • David Letson

    () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)

  • Forest Nelson

    () (Department of Economics, Henry B. Tippie College of Business Administration, University of Iowa)

  • David S. Nolan

    () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)

  • Daniel Solis

    () (Rosenstiel School of Marine and Atmospheric Science, University of Miami)

Abstract

This paper studies how individuals update subjective risk perceptions in response to hurricane track forecast information, using a unique data set from an event market, the Hurricane Futures Market (HFM). We derive a theoretical Bayesian framework which predicts how traders update their perceptions of the probability of a hurricane making landfall in a certain range of coastline. Our results suggest that traders behave in a way consistent with Bayesian updating but this behavior is based on the perceived quality of the information received.

Suggested Citation

  • David Kelly & David Letson & Forest Nelson & David S. Nolan & Daniel Solis, 2009. "Evolution of Subjective Hurricane Risk Perceptions: A Bayesian Approach," Working Papers 0905, University of Miami, Department of Economics.
  • Handle: RePEc:mia:wpaper:0905
    as

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    File URL: http://www.bus.miami.edu/_assets/files/faculty-and-research/academic-departments/eco/eco-working-papers/wp2009-05-kelly-hfm3_1_09.pdf
    File Function: First version, 2009
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    References listed on IDEAS

    as
    1. Trudy Ann Cameron, 2001. "Updating Subjective Risks in the Presence of Conflicting Information: An Application to Climate Change," University of Oregon Economics Department Working Papers 2003-8, University of Oregon Economics Department, revised 14 Jul 2001.
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    Citations

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    Cited by:

    1. Atsushi Kajii & Takahiro Watanabe, 2014. "Favorite-Longshot Bias in Parimutuel Betting: an Evolutionary Explanation," KIER Working Papers 907, Kyoto University, Institute of Economic Research.
    2. repec:eee:jeborg:v:140:y:2017:i:c:p:56-69 is not listed on IDEAS
    3. Karsten Hueffer & Miguel A. Fonseca & Anthony Leiserowitz & Karen M. Taylor, 2013. "The wisdom of crowds: Predicting a weather and climate-related event," Judgment and Decision Making, Society for Judgment and Decision Making, pages 91-105.

    More about this item

    Keywords

    risk perceptions; learning; Bayesian learning; event markets; prediction markets; favorite-longshot bias; hurricanes;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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