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

18 Pages Posted: 19 Jul 2012

See all articles by Lionel Page

Lionel Page

Queensland University of Technology

David A. Savage

Queensland University of Technology; QuBE; CEDM

Benno Torgler

Queensland University of Technology; CREMA; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: July 18, 2012

Abstract

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.

Keywords: decision under risk, large losses, natural experiment

JEL Classification: D030, D810, C930

Suggested Citation

Page, Lionel and Savage, David A. and Torgler, Benno, Variation in Risk Seeking Behavior in a Natural Experiment on Large Losses Induced by a Natural Disaster (July 18, 2012). CESifo Working Paper Series No. 3878. Available at SSRN: https://ssrn.com/abstract=2111922

Lionel Page

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

David A. Savage

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

QuBE ( email )

2 George Street
GPO Box 2434
Brisbane, 4510
Australia

CEDM ( email )

Brisbane, 4001
Australia

Benno Torgler (Contact Author)

Queensland University of Technology ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

CREMA

Gellertstrasse 18
Basel
Zurich, CH 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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