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

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.

Keywords: decision under risk, large losses, natural experiment

JEL Classification: D03, D81, C93