Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5066692 | European Economic Review | 2014 | 11 Pages |
â¢We study how risky behaviour changes after large losses.â¢We use a flood in an urban area as a natural experiment.â¢Losses are correlated with propensity to prefer a lottery ticket to a $10 fee.â¢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.