Self-protection against repeated low probability risks

Abstract (via Aric P Shafran)

This paper reports the results of experiments designed to test the effect of experience on preferences for self-protection against low and high probability losses. Subjects gained experience by repeatedly making choices about whether or not to invest in a protective activity and then observing the result of their choice. Half of the subjects faced a low probability risk while the other half faced a higher probability risk with the severity of loss scaled down to hold expected value constant. Protection was more common against the high probability risk. Despite receiving full information about the risks in advance, most subjects made choices in response to prior outcomes. This led to a great deal of experimentation when losses were common (the high probability risk) but very little experimentation when losses were infrequent (the low probability risk).

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19. April 2011 by Miguel Barbosa
Categories: Curated Readings, Risk & Uncertainty | Leave a comment

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