Do people feel less at risk? Evidence from disaster experience

Past studies typically have focused on whether people perceive more rare risk after experiencing catastrophic disasters. We show that people can also feel less risk with unexpected lucky disaster experience. By exploring a novel identification strategy based on households’ expectations, we find that...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial economics 2020-12, Vol.138 (3), p.866-888
Main Authors: Gao, Ming, Liu, Yu-Jane, Shi, Yushui
Format: Article
Language:English
Subjects:
Business schools
Disaster experiences
Disasters
Emergency preparedness
Financial management
Households
Incomplete information learning
Life insurance
Risk
Risk factors
Risk perceptions
Risk preferences
Salience theory
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Past studies typically have focused on whether people perceive more rare risk after experiencing catastrophic disasters. We show that people can also feel less risk with unexpected lucky disaster experience. By exploring a novel identification strategy based on households’ expectations, we find that households perceive less (more) risk when they experience disasters that have lower (higher) fatalities than what was expected. This opposite experience effect of rare disasters is substantial. A one standard deviation increase in the negative (positive) experience shock is associated with a 1.71% decrease (a 1.31% increase) in the life insurance-to-portfolio ratio. We discuss three possible mechanisms to account for our empirical findings: incomplete information learning, salience theory, and change in risk preferences.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2020.06.010