The Perception of Lethal Risks: Evidence from a Laboratory Experiment

Manuel Schubert () and Tilman Brück

No 8578, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We run a novel experiment to explore the relationship between the perception of real-life risks and the demand for risk reduction. Subjects play a series of loss lotteries in which the odds are matched to the likelihood of lethal events in real life. For each risk, subjects can pay premiums in order to reduce the likelihood of total bankruptcy. Our results show a complex interplay of mortality perception and demand for risk reduction. We observe that perceived annual mortality positively affects the demand for risk reduction. Moreover, we find certain risk characteristics to affect perceived mortality, others to drive the demand for risk reduction, and some to alter both. Our findings suggest that 30 percent of all insurance payments are due to biased perceptions of annual mortality while perfect precaution could lower payments by 45 percent. Implications for risk management policies are discussed.

Keywords: risk perception; lethal risks; experiment; insurance (search for similar items in EconPapers)
JEL-codes: C9 D81 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-10
New Economics Papers: this item is included in nep-exp and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Perception of Lethal Risks - Evidence from a Laboratory Experiment (2014)
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