WP 2015-04 Behavioral Responses towards Risk Mitigation: An Experiment with Wild Fire Risks

Posted On April 6, 2015
Categories Working Papers, WP 2015

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ABSTRACT. What are the behavioral effects of voluntary self-protection in situations where the probabilities are unknown to the agent? Virtually all naturally occurring environments of risk management involve subjective probabilities, and many allow decision makers to voluntarily mitigate risk using self-protection activities. To examine this environment we design a laboratory experiment in which incomplete information about probabilities is generated in a naturalistic way from the perspective of decision makers, but where the experimenter has complete information. Specifically, we use virtual simulations of property that is at risk of destruction from simulated wild fires. Using direct belief elicitation mechanisms we find that subjective beliefs over high and low risk scenarios underestimate the shift. Thus, predictions of voluntary self-protection activities based on such data would estimate a suboptimal willingness to invest. However, when offering subjects’ self-protection opportunities, their choices indicate that they over-estimate the risk reducing effects and would in fact be willing to pay more than if they knew the objective probabilities. These findings have direct implications for the normative evaluation of risk management policies when risk perception is subjective.