Valuing risks of death from terrorism and natural disasters

This paper uses a random utility model to examine stated preferences for the valuation of public risks of fatalities from terrorist attacks and natural disasters. Traffic-related deaths serve as the common reference point in two series of pairwise risk-risk tradeoff choices. Even after taking into account differences in respondent risk beliefs, the nationally representative sample values the prevention of terrorism deaths almost twice as highly as preventing natural disaster deaths and at about the same level as preventing deaths from traffic accidents, which pose greater personal risk. Education, seatbelt usage, political preferences, and terrorism risk beliefs affect valuations in the expected manner.

Gender,risk and stereotypes

This paper reports results from an economic experiment where respondents are asked to make choices between risky outcomes for themselves and others. We investigate whether subjects’ own risk preferences and gender stereotypes are reflected in the predictions they make for the risk preferences of others and the way this occurs. When predicting other people’s risk preferences, the respondents tend to use a combination of their own risk preferences and stereotypes. Moreover, when making risky choices for others, the respondents generally use a combination of their own risk preferences and their average predicted risk preference of the targeted group.

Paying for permanence: Public preferences for contaminated site cleanup

We use conjoint choice questions to investigate the preferences of people in four cities in Italy for income and future/permanent mortality risk reductions delivered by contaminated site remediation policies. The VSL is €5.6 million for an immediate risk reduction. If the risk reduction takes place 20 years from now, the implied VSL is €1.26 million. Respondents’ implicit discount rate is 7%. The VSL depends on respondent characteristics, familiarity with contaminated sites, concern about the health effects of exposure to toxicants, having a family member with cancer, perceived usefulness of public programs and beliefs about the goals of government remediation programs.

Preferences and decision errors in the winner’s curse

The problem of asymmetric information causes a winner’s curse in many environments. Given many unsuccessful attempts to eliminate it, we hypothesize that some people ‘prefer’ the lotteries underlying the winner’s curse. Study 1 shows that after removing the hypothesized cause of error, asymmetric information, half the subjects still prefer winner’s curse lotteries, implying past efforts to de-bias the winner’s curse may have been more successful than previously recognized since subjects prefer these lotteries. Study 2 shows risk-seeking preferences only partially explain lottery preferences, while non-monetary sources of utility may explain the rest. Study 2 suggests lottery preferences are not independent of context, and offers methods to reduce the winner’s curse.

The ostrich effect: Selective attention to information

We develop and test a model which links information acquisition decisions to the hedonic utility of information. Acquiring and attending to information increases the psychological impact of information (an impact effect), increases the speed of adjustment for a utility reference-point (a reference-point updating effect), and affects the degree of risk aversion towards randomness in news (a risk aversion effect). Given plausible parameter values, the model predicts asymmetric preferences for the timing of resolution of uncertainty: Individuals should monitor and attend to information more actively given preliminary good news but “put their heads in the sand” by avoiding additional information given adverse prior news. We test for such an “ostrich effect” in a finance context, examining the account monitoring behavior of Scandinavian and American investors in two datasets. In both datasets, investors monitor their portfolios more frequently in rising markets than when markets are flat or falling.

Pre-commitment and flexibility in a time decision experiment

An agent with dynamically inconsistent preferences may deviate from her plan of action as the future draws near. An exponential discounter may do exactly the same when facing an uncertain future. Through an experiment we compare preference-based vs. uncertainty-based explanations for choice reversal over time by eliciting choices for pre-commitment and flexibility. Evidence of widespread commitment favors a preference-based explanation.

An experimental investigation of violations of transitivity in choice under uncertainty

Several models of decision-making imply systematic violations of transitivity of preference. Our experiments explored whether people show patterns of intransitivity predicted by regret theory and majority rule. To distinguish “true” violations from those produced by “error,” a model was fit in which each choice can have a different error rate and each person can have a different pattern of true preferences that need not be transitive. Error rate for a choice is estimated from preference reversals between repeated presentations of that same choice. Our results showed that very few people repeated intransitive patterns. We can retain the hypothesis that transitivity best describes the data of the vast majority of participants.

Can ranking techniques elicit robust values?

This paper reports two experiments which examine the use of ranking methods to elicit ‘certainty equivalent’ values. It investigates whether such methods are able to eliminate the disparities between choice and value which constitute the ‘preference reversal phenomenon’ and which thereby pose serious problems for both theory and policy application. The results show that ranking methods are vulnerable to distorting effects of their own, but that when such effects are controlled for, the preference reversal phenomenon, previously so strong and striking, is very considerably attenuated.

Statistical vs. identified lives in benefit-cost analysis

Evaluation of projects that affect mortality risk usually assumes that risk changes are small and similar across individuals. In reality, risks differ among individuals and information about risk heterogeneity determines the extent to which affected lives are “statistical” or “identified” and influences the outcome of benefit-cost analysis (BCA). The effects of information about risk heterogeneity on BCA depend on, inter alia, whether information concerns heterogeneity of baseline or change in risk and whether valuation uses compensating or equivalent variation. BCA does not systematically favor identified over statistical lives. We suggest some political factors that may explain the apparent public bias.

Perception of own death risk

Individuals’ perception of their own road-traffic and overall mortality risks are examined in this paper. Perceived risk is compared with the objective risk of the respondents’ peers, i.e. their own gender and age group, and the results suggest that individuals’ risk perception of their own risk is biased. For road-traffic risk we obtain similar results to what have been found previously in the literature, overassessment and underassessment among low- and high-risk groups, respectively. For overall risk we find that all risk groups underestimate their risk. The results also indicate that men's risk bias is larger than women’s.

Myopic risk-seeking: The impact of narrow decision bracketing on lottery play

In two experiments conducted with low-income participants, we find that individuals are more likely to buy state lottery tickets when they make several purchase decisions one-at-a-time, i.e. myopically, than when they make one decision about how many tickets to purchase. These results extend earlier findings showing that “broad bracketing” of decisions encourages behavior consistent with expected value maximization. Additionally, the results suggest that the combination of myopic decision making and the “peanuts effect”—greater risk seeking for low stakes than high stakes gambles—can help explain the popularity of state lotteries.

Valuing publicly sponsored research projects: Risks,scenario adjustments,and inattention

Survey-based choice scenarios used to value non-market public goods typically preclude any risk that the benefits described may not be delivered. Our survey specifies explicit risks of (a) outright program failure and (b) program redundancy due to possible private sector substitutes. Additionally, most analyses assume that survey subjects fully accept these scenarios and that all provided information receives their complete attention. Our discounted expected utility model of choice accommodates both these objective risks and the possibility of subjective scenario adjustment or selective inattention by respondents. We then counterfactually simulate willingness-to-pay in the absence of these distortions.

Third-generation prospect theory

We present a new theory of decision under uncertainty: third-generation prospect theory (PT³). This retains the predictive power of previous versions of prospect theory, but extends that theory by allowing reference points to be uncertain while decision weights are specified in a rank-dependent way. We show that PT³ preferences respect a state-conditional form of stochastic dominance. The theory predicts the observed tendency for willingness-to-accept valuations of lotteries to be greater than willingness-to-pay valuations. When PT³ is made operational by using simple functional forms with parameter values derived from existing experimental evidence, it predicts observed patterns of the preference reversal phenomenon.

Self-protection and insurance with interdependencies

We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles or selling “at-fault” insurance can partially internalize this externality and thereby improve individual and social welfare.

Scope insensitivity in health risk reduction studies: A comparison of choice experiments and the contingent valuation method for valuing safer food

Scope insensitivity and embedding are fundamental concerns in contingent valuation studies for health risk reductions. Recently, choice experiments have increasingly been used to obtain contingent willingness to pay (WTP) estimates. We juxtapose the WTP estimates of a choice experiment (CE) to those of the contingent valuation method (CVM) for different health risk reductions and compare them in the extent of scope insensitivity and embedding. WTP using CVM is scope sensitive for single health risks, but embedding is observed for multiple disease risks. In contrast, WTP based on the CE is highly scope sensitive and convex in risk reduction levels.

Prospect theory for continuous distributions

We extend the original form of prospect theory by Kahneman and Tversky from finite lotteries to arbitrary probability distributions, using an approximation method based on weak-⋆ convergence. The resulting formula is computationally easier than the corresponding formula for cumulative prospect theory and makes it possible to use prospect theory in future applications in economics and finance. Moreover, we suggest a method how to incorporate a crucial step of the “editing phase” into prospect theory and to remove in this way the discontinuity of the original model.

One-reason decision-making: Modeling violations of expected utility theory

People violate expected utility theory and this has been traditionally modeled by augmenting its weight-and-add framework by nonlinear transformations of values and probabilities. Yet individuals often use one-reason decision-making when making court decisions or choosing cellular phones, and institutions do the same when creating rules for traffic safety or fair play in sports. We analyze a model of one-reason decision-making, the priority heuristic, and show that it simultaneously implies common consequence effects, common ratio effects, reflection effects, and the fourfold pattern of risk attitude. The preferences represented by the priority heuristic satisfy some standard axioms. This work may provide the basis for a new look at bounded rationality.

Environmental disasters as risk regulation catalysts? The role of Bhopal,Chernobyl, Exxon Valdez,Love Canal,and Three Mile Island in shaping U.S. environmental law

Unexpected events such as environmental catastrophes capture wide public attention. Soon after five major shocks—Three Mile Island, Love Canal, Bhopal, Chernobyl, and the Exxon Valdez oil spill—Congress voted on new risk regulation. This paper conducts an event study to test whether individual congressional representatives were “shocked” by these environmental disasters into increasing their probability of voting in favor of risk legislation. On average, representatives were less likely to vote in favor of bills tied to these five events. Significant heterogeneity in representatives’ responses to these shocks is documented. Liberal Northeast representatives were most likely to increase their pro-environment voting in the aftermath of these shocks.

Predicted risk perception and risk-taking behavior: The case of impaired driving

Research suggests an association between risk perception and risk-taking behavior in a variety of contexts. There is empirical evidence that perceived risk is generally biased and that perception of risk influences behavior. Perception of risk can be endogenous. It is therefore more appropriate to instrument risk perception. This article studies the perception of the risks associated with impaired driving and the relation between predicted risk perception and driving behavior. We survey a sample of license-holders, half of whom are drivers with a past conviction for impaired driving, the other half or control group without such conviction. Predicted perceptual biases are shown to influence actual driving behavior.