Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster
Queensland University of Technology - Judge Business School, University of Cambridge
David A. Savage
Queensland University of Technology
Queensland University of Technology; CREMA; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
July 18, 2012
CESifo Working Paper Series No. 3878
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.
Number of Pages in PDF File: 18
Keywords: decision under risk, large losses, natural experiment
JEL Classification: D030, D810, C930working papers series
Date posted: July 19, 2012
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