When Risk Perception Gets in the Way: Probability Weighting and Underprevention

39 Pages Posted: 12 Jul 2018  

Aurelien Baillon

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Han Bleichrodt

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Australian National University (ANU) - School of Economics

Aysil Emirmahmutoglu

Erasmus University Rotterdam (EUR)

Johannes Gerd Jaspersen

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Richard Peter

University of Iowa

Date Written: June 16, 2018

Abstract

Personal decisions about health hazards are the main cause of impaired health and premature death. People smoke and eat too much and exercise too little. The lack of preventive efforts is surprising given their proven effectiveness. Arrow's (1963) classical paper suggested that moral hazard might be a reason for underprevention but Ehrlich and Becker (1972) challenged this explanation. In this paper we show that underprevention might be caused by misperceived probabilities. We derive when and how probability weighting gets in the way of prevention by blurring its benefits. We use a general model of prevention, encompassing several special cases from the literature. We also show how perceived ambiguity makes the problem of underprevention even worse by amplifying the effect of probability weighting.

Keywords: Prevention, Probability Weighting, Likelihood Insensitivity, Medical Decision Making

JEL Classification: D11, D80, D81, G2, I12

Suggested Citation

Baillon, Aurelien and Bleichrodt, Han and Emirmahmutoglu, Aysil and Jaspersen, Johannes Gerd and Peter, Richard, When Risk Perception Gets in the Way: Probability Weighting and Underprevention (June 16, 2018). Available at SSRN: https://ssrn.com/abstract=3199867 or http://dx.doi.org/10.2139/ssrn.3199867

Aurelien Baillon

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Han Bleichrodt

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Australian National University (ANU) - School of Economics ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia

Aysil Emirmahmutoglu

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Johannes Gerd Jaspersen

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, 80539
Germany

Richard Peter (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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