The Perception of Lethal Risks: Evidence from a Laboratory Experiment

35 Pages Posted: 25 Oct 2014

See all articles by Manuel Schubert

Manuel Schubert

University of Passau

Tilman Brück

IGZ - Leibniz Institute of Vegetable and Ornamental Crops; ISDC - International Security and Development Center; IZA Institute of Labor Economics

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

JEL Classification: C9, D81

Suggested Citation

Schubert, Manuel and Brück, Tilman, The Perception of Lethal Risks: Evidence from a Laboratory Experiment. IZA Discussion Paper No. 8578, Available at SSRN: https://ssrn.com/abstract=2514771 or http://dx.doi.org/10.2139/ssrn.2514771

Manuel Schubert (Contact Author)

University of Passau ( email )

Tilman Brück

IGZ - Leibniz Institute of Vegetable and Ornamental Crops ( email )

Theodor-Echtermeyer-Str. 1
Grossbeeren, 14979
Germany

HOME PAGE: http://www.igzev.de

ISDC - International Security and Development Center ( email )

Friedrichstr. 88
Berlin, 10117
Germany

HOME PAGE: http://www.isd-center.org

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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