Broad Bracketing for Low Probability Events

Abstract

Individuals tend to underprepare for rare, catastrophic events because of biases in risk perception. A simple form of broad bracketing — presenting the cumulative probability of loss over a longer time horizon — has the potential to alleviate these barriers to risk perception and increase protective actions such as purchasing flood insurance. However, it is an open question whether broad bracketing effects last over time: There is evidence that descriptive probability information is ignored when decisions are made from “experience” (repeatedly and in the face of feedback), which describes many protective decisions. Across six incentive-compatible experiments with high stakes, we find that the broad bracketing effect does not disappear or change size when decisions are made from experience. We also advance our understanding of the mechanisms underlying broad bracketing, finding that, while cumulative probability size is a strong driver of the effect, this is dampened for larger brackets which lead people to be less sensitive to probability size.

Keywords: Broad bracketing; Risk communication, Decisions from experience, Cumulative probabilities, Low-probability high-consequence events, Insurance

JEL Classification: D81, D91, D01