Understanding Cumulative Risk Perception from Judgments and Choices: An Application to Flood Risks

Catastrophic events, such as floods, earthquakes, hurricanes, and tsunamis, are rare, yet the cumulative risk of each event occurring at least once over an extended time period can be substantial. In this work, we assess the perception of cumulative flood risks, how those perceptions affect the choice of insurance, and whether perceptions and choices are influenced by cumulative risk information. We find that participants' cumulative risk judgments are well represented by a bimodal distribution, with a group that severely underestimates the risk and a group that moderately overestimates it. Individuals who underestimate cumulative risks make more risk‐seeking choices compared to those who overestimate cumulative risks. Providing explicit cumulative risk information for relevant time periods, as opposed to annual probabilities, is an inexpensive and effective way to improve both the perception of cumulative risk and the choices people make to protect against that risk.