Variation in risk seeking behaviour following large losses: A natural experiment

- We study how risky behaviour changes after large losses.
- We use a flood in an urban area as a natural experiment.
- Losses are correlated with propensity to prefer a lottery ticket to a $10 fee.
- This result is in line with Prospect Theory prediction.

This study explores people׳s risk taking behaviour 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 regarding the adoption of a risk-seeking attitude after a loss.