Abstract
Low-lying densely populated areas can be susceptible to flooding due to extreme river discharges. Insurance may be used to spread flood risk and reduce potential material damages. However, homeowners often purchase insufficient amounts of insurance against natural hazard risks like flooding, which may be due to the way they process probabilities. A common finding from (Cumulative) Prospect Theory is that individuals over-weight low probabilities and under-weight moderate to high probabilities in making decisions under risk. However, very low probabilities typical of flood risks are either significantly over-weighted or neglected altogether. This study aims to examine factors related to flood insurance demand regarding emotions specific to risk, like immediate and anticipated emotions, the threshold level of concern as well as personality traits, like locus of control. In addition, we compare results under real experiment incentives to hypothetical ones with high loss outcomes. Based on data collected from 1041 homeowners in the Netherlands, we find that: an internal locus of control and anticipated regret about potentially uninsured flood losses is related to higher flood insurance demand. The use of the threshold of concern model is related to more probability under-weighting/less probability over-weighting when probabilities of flooding are low. Several policies are suggested to overcome psychological factors related to low demand for flood insurance to improve future flood preparations.
| Original language | English |
|---|---|
| Article number | 100144 |
| Journal | Water Resources and Economics |
| DOIs | |
| Publication status | Published - 1 Jan 2019 |
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Keywords
- Cumulative prospect theory
- Flood insurance demand
- Hypothetical bias
- Risk preferences
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Flood insurance demand and probability weighting : The influences of regret, worry, locus of control and the threshold of concern heuristic. / Robinson, Peter John; Botzen, W. J.Wouter.
In: Water Resources and Economics, 01.01.2019.Research output: Contribution to Journal › Article › Academic › peer-review
TY - JOUR
T1 - Flood insurance demand and probability weighting
T2 - The influences of regret, worry, locus of control and the threshold of concern heuristic
AU - Robinson, Peter John
AU - Botzen, W. J.Wouter
PY - 2019/1/1
Y1 - 2019/1/1
N2 - Low-lying densely populated areas can be susceptible to flooding due to extreme river discharges. Insurance may be used to spread flood risk and reduce potential material damages. However, homeowners often purchase insufficient amounts of insurance against natural hazard risks like flooding, which may be due to the way they process probabilities. A common finding from (Cumulative) Prospect Theory is that individuals over-weight low probabilities and under-weight moderate to high probabilities in making decisions under risk. However, very low probabilities typical of flood risks are either significantly over-weighted or neglected altogether. This study aims to examine factors related to flood insurance demand regarding emotions specific to risk, like immediate and anticipated emotions, the threshold level of concern as well as personality traits, like locus of control. In addition, we compare results under real experiment incentives to hypothetical ones with high loss outcomes. Based on data collected from 1041 homeowners in the Netherlands, we find that: an internal locus of control and anticipated regret about potentially uninsured flood losses is related to higher flood insurance demand. The use of the threshold of concern model is related to more probability under-weighting/less probability over-weighting when probabilities of flooding are low. Several policies are suggested to overcome psychological factors related to low demand for flood insurance to improve future flood preparations.
AB - Low-lying densely populated areas can be susceptible to flooding due to extreme river discharges. Insurance may be used to spread flood risk and reduce potential material damages. However, homeowners often purchase insufficient amounts of insurance against natural hazard risks like flooding, which may be due to the way they process probabilities. A common finding from (Cumulative) Prospect Theory is that individuals over-weight low probabilities and under-weight moderate to high probabilities in making decisions under risk. However, very low probabilities typical of flood risks are either significantly over-weighted or neglected altogether. This study aims to examine factors related to flood insurance demand regarding emotions specific to risk, like immediate and anticipated emotions, the threshold level of concern as well as personality traits, like locus of control. In addition, we compare results under real experiment incentives to hypothetical ones with high loss outcomes. Based on data collected from 1041 homeowners in the Netherlands, we find that: an internal locus of control and anticipated regret about potentially uninsured flood losses is related to higher flood insurance demand. The use of the threshold of concern model is related to more probability under-weighting/less probability over-weighting when probabilities of flooding are low. Several policies are suggested to overcome psychological factors related to low demand for flood insurance to improve future flood preparations.
KW - Cumulative prospect theory
KW - Flood insurance demand
KW - Hypothetical bias
KW - Risk preferences
UR - http://www.scopus.com/inward/record.url?scp=85064978838&partnerID=8YFLogxK
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U2 - 10.1016/j.wre.2019.100144
DO - 10.1016/j.wre.2019.100144
M3 - Article
JO - Water Resources and Economics
JF - Water Resources and Economics
SN - 2212-4284
M1 - 100144
ER -