FEEM working papers "Note di lavoro" series
2012 .054

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


Authors: Lionel Page, David Savage, Benno Torgler
Series: Economy and Society
Editor: Giuseppe Sammarco
Keywords: Decision under Risk, Large Losses, Natural Experiment
JEL n.: D03, D81, C93

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.

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