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The Perception of Lethal Risks: Evidence from a Laboratory Experiment

Author

Listed:
  • Schubert, Manuel

    (University of Passau)

  • Brück, Tilman

    (ISDC - International Security and Development Center)

Abstract
We run a novel experiment to explore the relationship between the perception of real-life risks and the demand for risk reduction. Subjects play a series of loss lotteries in which the odds are matched to the likelihood of lethal events in real life. For each risk, subjects can pay premiums in order to reduce the likelihood of total bankruptcy. Our results show a complex interplay of mortality perception and demand for risk reduction. We observe that perceived annual mortality positively affects the demand for risk reduction. Moreover, we find certain risk characteristics to affect perceived mortality, others to drive the demand for risk reduction, and some to alter both. Our findings suggest that 30 percent of all insurance payments are due to biased perceptions of annual mortality while perfect precaution could lower payments by 45 percent. Implications for risk management policies are discussed.

Suggested Citation

  • Schubert, Manuel & Brück, Tilman, 2014. "The Perception of Lethal Risks: Evidence from a Laboratory Experiment," IZA Discussion Papers 8578, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp8578
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    References listed on IDEAS

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    1. Benjamin, Daniel K & Dougan, William R, 1997. "Individuals' Estimates of the Risks of Death: Part I--A Reassessment of the Previous Evidence," Journal of Risk and Uncertainty, Springer, vol. 15(2), pages 115-133, November.
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    4. Johnson, Eric J & Hershey, John & Meszaros, Jacqueline & Kunreuther, Howard, 1993. "Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
    5. Jenni, Karen E & Loewenstein, George, 1997. "Explaining the "Identifiable Victim Effect."," Journal of Risk and Uncertainty, Springer, vol. 14(3), pages 235-257, May-June.
    6. Sunstein, Cass R, 1997. "Bad Deaths," Journal of Risk and Uncertainty, Springer, vol. 14(3), pages 259-282, May-June.
    7. Susan Chilton & Michael Jones-Lee & Francis Kiraly & Hugh Metcalf & Wei Pang, 2006. "Dread risks," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 165-182, December.
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    Cited by:

    1. Zhengtao Li & Henk Folmer, 2023. "Air pollution and perception-based averting behaviour in the Jinchuan mining area, China," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 70(2), pages 477-505, April.

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    More about this item

    Keywords

    risk perception; lethal risks; experiment; insurance;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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