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Variation in risk seeking behavior following large losses: A natural experiment

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  • Lionel Page
  • David A. Savage
  • Benno Torgler

Abstract

This study explores people's risk attitudes after having suff ered 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 A. Savage & Benno Torgler, 2013. "Variation in risk seeking behavior following large losses: A natural experiment," QuBE Working Papers 007, QUT Business School.
  • Handle: RePEc:qut:qubewp:wp007
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    File URL: http://external-apps.qut.edu.au/business/documents/QuBEWorkingPapers/2013/Flood_PST.pdf
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    References listed on IDEAS

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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. Krawczyk, Michal & Trautmann, Stefan & van de Kuilen, Gijs, 2017. "Catastrophic risk : Social influences on insurance decisions," Other publications TiSEM 32c55717-0cd7-46b0-8f2b-6, Tilburg University, School of Economics and Management.
    3. 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.
    4. 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.
    5. Michael Berlemann & Max Steinhardt & Jascha Tutt, 2015. "Do Natural Disasters Stimulate Individual Saving? Evidence from a Natural Experiment in a Highly Developed Country," SOEPpapers on Multidisciplinary Panel Data Research 763, DIW Berlin, The German Socio-Economic Panel (SOEP).
    6. Victor Stephane, 2016. "How Do Natural Disasters Affect Saving Behavior?," Working Papers halshs-01409651, HAL.
    7. 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.
    8. 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.
    9. 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.
    10. repec:kap:theord:v:82:y:2017:i:3:d:10.1007_s11238-016-9571-y is not listed on IDEAS
    11. 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.
    12. 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.
    13. 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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