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

Listed author(s):
  • Lionel Page

    ()

    (QUT)

  • David Savage

    ()

    (QUT)

  • Benno Torgler

    ()

    (QUT)

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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File URL: http://www.ncer.edu.au/papers/documents/WP83R.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 83.

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Length: 18 pages
Date of creation: 07 Jun 2012
Date of revision: 09 Jul 2012
Handle: RePEc:qut:auncer:2012_6
Contact details of provider: Phone: 07 3138 5066
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

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