Determinants of probability neglect and risk attitudes for disaster risk: An online experimental study of flood insurance demand among homeowners

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Abstract

Little is known about why individuals place either a high or a very low value on mitigating risks of disaster-type events, like floods. This study uses panel data methods to explore the psychological factors affecting probability neglect of flood risk relevant to the zero end-point of the probability weighting function in Prospect Theory, and willingness-to-pay for flood insurance. In particular, we focus on explanatory variables of anticipatory and anticipated emotions, as well as the threshold of concern. Moreover, results obtained under real and hypothetical incentives are compared in an experiment with high experimental outcomes. Based on our findings, we suggest several policy recommendations to overcome individual decision processes, which may hinder flood protection efforts.

Original languageEnglish
Pages (from-to)2514-2527
Number of pages14
JournalRisk Analysis
Volume39
Issue number11
Early online date27 Jun 2019
DOIs
Publication statusPublished - Nov 2019

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Flood insurance
Disasters
Insurance
Motivation
Emotions
Psychology
Experiments

Keywords

  • Flood insurance demand
  • incentives
  • probability neglect
  • prospect theory
  • risk preferences

Cite this

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abstract = "Little is known about why individuals place either a high or a very low value on mitigating risks of disaster-type events, like floods. This study uses panel data methods to explore the psychological factors affecting probability neglect of flood risk relevant to the zero end-point of the probability weighting function in Prospect Theory, and willingness-to-pay for flood insurance. In particular, we focus on explanatory variables of anticipatory and anticipated emotions, as well as the threshold of concern. Moreover, results obtained under real and hypothetical incentives are compared in an experiment with high experimental outcomes. Based on our findings, we suggest several policy recommendations to overcome individual decision processes, which may hinder flood protection efforts.",
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