Do People Feel Less at Risk? Evidence from Disaster Experience
87 Pages Posted: 29 Aug 2019 Last revised: 12 Dec 2020
Date Written: July 23, 2019
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: Suggested Citation