Do People Feel Less at Risk? Evidence from Disaster Experience

87 Pages Posted: 29 Aug 2019 Last revised: 12 Dec 2020

See all articles by Ming Gao

Ming Gao

Peking University - School of Economics

Yu-Jane Liu

Peking University - Guanghua School of Management

Yushui Shi

Monash University - Department of Banking and Finance; University of California, Irvine - Paul Merage School of Business

Date Written: July 23, 2019

Abstract

Past studies typically have focused on whether people perceive more rare risk after experiencing catastrophic disasters. We show that people can also feel less risk with unexpected “lucky” disaster experience. By exploring a novel identification strategy based on households’ expectations, we find that households perceive less (more) risk when they experience disasters that have lower (higher) actual fatalities than what was expected. This opposite experience effect of rare disasters is substantial: a one standard deviation increase in the negative (positive) experience shock is associated with a 1.71% decrease (a 1.31% increase) in the life insurance-to-portfolio ratio. We discuss three possible mechanisms to account for our empirical findings: incomplete information learning, salience theory, and change in risk preferences.

Keywords: disaster experiences; risk perceptions; incomplete information learning; salience theory; risk preferences

JEL Classification: D14, D81, D83, G11, G41

Suggested Citation

Gao, Ming and Liu, Yu-Jane and Shi, Yushui, Do People Feel Less at Risk? Evidence from Disaster Experience (July 23, 2019). Journal of Financial Economics (JFE), Vol. 138, No. 3, 2020, Available at SSRN: https://ssrn.com/abstract=3443901

Ming Gao

Peking University - School of Economics ( email )

Beijing, 100871
China

HOME PAGE: http://scholar.pku.edu.cn/gao

Yu-Jane Liu (Contact Author)

Peking University - Guanghua School of Management ( email )

Beijing
China

Yushui Shi

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

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