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Behavioral Responses towards Risk Mitigation: An Experiment with Wild Fire Risks
School of Business and the Center for Economic Analysis, Middle Georgia State College, Macon, GA, USA.
Department of Risk Management & Insurance, Robinson College of Business and Center for the Economic Analysis of Risk, Georgia State University, Atlanta, GA, USA.
Dean’s Behavioral Economics Lab, Robinson College of Business and Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, USA.ORCID iD: 0000-0001-8616-3318
2015 (English)Report (Other academic)
Abstract [en]

What are the behavioral effects of voluntary self-protection in situations where the probabilities are unknown to the agent? Virtually all naturally occurring environments of risk management involve subjective probabilities, and many allow decision makers to voluntarily mitigate risk using self-protection activities. To examine this environment we design a laboratory experiment in which incomplete information about probabilities is generated in a naturalistic way from the perspective of decision makers, but where the experimenter has complete information. Specifically, we use virtual simulations of property that is at risk of destruction from simulated wild fires. Using direct belief elicitation mechanisms we find that subjective beliefs over high and low risk scenarios underestimate the shift. Thus, predictions of voluntary self-protection activities based on such data would estimate a suboptimal willingness to invest. However, when offering subjects’ self-protection opportunities, their choices indicate that they over-estimate the risk reducing effects and would in fact be willing to pay more than if they knew the objective probabilities. These findings have direct implications for the normative evaluation of risk management policies when risk perception is subjective.

Place, publisher, year, edition, pages
Georgia State University , 2015. , p. 61
Center for the Economic Analysis of Risk, Working Papers ; WP 2015/04
Keywords [en]
Risk mitigation, behavior, subjective beliefs
National Category
Economics and Business
URN: urn:nbn:se:oru:diva-68878OAI: oai:DiVA.org:oru-68878DiVA, id: diva2:1247503
Available from: 2018-09-12 Created: 2018-09-12 Last updated: 2018-09-13Bibliographically approved

Open Access in DiVA