Dynamics in Risk Taking with a Low-Probability Hazard

Andrew Royal ()
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Andrew Royal: Resources for the Future

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Abstract: The experiment reported in this paper identifies the effect of experience on revealed risk attitudes by examining “one-shot” insurance choices made by subjects faced with a low-probability risk and their choices when they are faced with repeated exposure to an identical risk. I find that subjects engaged in greater risk taking when making repeated choices. Estimates from models that extend the standard utility and Bayesian frameworks offer evidence that subjects’ risk taking was influenced by whether previous outcomes were experienced directly and by inertia across repeated choices, though on average subjects appear to have otherwise weighted experienced outcomes in a manner consistent with rational Bayesian inference. I discuss how these and other insights apply to market behavior and policy in the presence of infrequent environmental hazards.

Keywords: flood risk; insurance; Bayesian learning; experiments (search for similar items in EconPapers)
JEL-codes: C91 D03 D81 (search for similar items in EconPapers)
Date: 2016-11-08
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