IDEAS home Printed from https://ideas.repec.org/a/spr/masfgc/v18y2013i2p229-244.html
   My bibliography  Save this article

Individual preferences for reducing flood risk to near zero through elevation

Author

Listed:
  • W. Botzen
  • J. Aerts
  • J. Bergh

Abstract

Climate change is expected to increase the frequency and intensity of natural disasters. Adaptation investments are required in order to limit the projected increase in natural disaster risks. Adaptation measures can reduce risk partially or completely eliminate risk. The literature on behavioural economics suggests that individuals rarely undertake measures that limit risk partially, while they may place a considerable value on measures that reduce risk to zero. This is studied for a case of adaptation to climate change and its effects on flood risk in the Netherlands. In particular, we examine whether households are willing to invest in elevating newly built structures when this is framed as eliminating flood risk. The results indicate that a majority of homeowners (52%) is willing to make a substantial investment of €10,000 to elevate a new house to a level that is safe to flooding. Differences between willingness to pay (WTP) for flood insurance and WTP for risk elimination through elevation indicate that individuals place a considerable value on the latter adaptation option. This study estimates that the “safety premium” which individuals place on risk elimination is approximately between €35 and €45 per month. The existence of a safety premium has important implications for the design of climate change adaptation policies. The decision to invest in elevating homes is significantly correlated with the expected negative effects of climate change, perceptions of flood risks, individual risk attitudes, and living close to a main river. Copyright The Author(s) 2013

Suggested Citation

  • W. Botzen & J. Aerts & J. Bergh, 2013. "Individual preferences for reducing flood risk to near zero through elevation," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 18(2), pages 229-244, February.
    • Handle: RePEc:spr:masfgc:v:18:y:2013:i:2:p:229-244
    DOI: 10.1007/s11027-012-9359-5
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11027-012-9359-5
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11027-012-9359-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, May.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. W. Botzen & J. Bergh & L. Bouwer, 2010. "Climate change and increased risk for the insurance sector: a global perspective and an assessment for the Netherlands," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 52(3), pages 577-598, March.
    4. Botzen, W.J.W. & Aerts, J.C.J.H. & van den Bergh, J.C.J.M., 2009. "Willingness of homeowners to mitigate climate risk through insurance," Ecological Economics, Elsevier, vol. 68(8-9), pages 2265-2277, June.
    5. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    6. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    7. Nathalie Etchart-Vincent, 2009. "Probability weighting and the ‘level’ and ‘spacing’ of outcomes: An experimental study over losses," Journal of Risk and Uncertainty, Springer, vol. 39(1), pages 45-63, August.
    8. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    9. Pavel Kabat & Wim van Vierssen & Jeroen Veraart & Pier Vellinga & Jeroen Aerts, 2005. "Climate proofing the Netherlands," Nature, Nature, vol. 438(7066), pages 283-284, November.
    10. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-187, May.
    11. Kunreuther, Howard C. & Michel-Kerjan, Erwann O., 2011. "At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262516543, April.
    12. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
    13. Jessica E. Lamond & D. G. Proverbs & F. N. Hammond, 2009. "Accessibility of flood risk insurance in the UK: confusion, competition and complacency," Journal of Risk Research, Taylor & Francis Journals, vol. 12(6), pages 825-841, September.
    14. Paul Slovic & Melissa L. Finucane & Ellen Peters & Donald G. MacGregor, 2004. "Risk as Analysis and Risk as Feelings: Some Thoughts about Affect, Reason, Risk, and Rationality," Risk Analysis, John Wiley & Sons, vol. 24(2), pages 311-322, April.
    15. William Anderson & Scott A. Kjar, 2008. "Hurricane Katrina and the levees: taxation, calculation, and the matrix of capital," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 35(8), pages 569-578, July.
    16. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
    17. Susan Laury & Melayne McInnes & J. Swarthout, 2009. "Insurance decisions for low-probability losses," Journal of Risk and Uncertainty, Springer, vol. 39(1), pages 17-44, August.
    18. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 163-183, September.
    19. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    20. Richard E. Stewart & Barbara D. Stewart, 2001. "The Loss of the Certainty Effect," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 4(2), pages 29-49, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peter John Robinson & W. J. Wouter Botzen, 2022. "Setting descriptive norm nudges to promote demand for insurance against increasing climate change risk," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 27-49, January.
    2. Botzen, W.J.W. & van den Bergh, J.C.J.M., 2012. "Risk attitudes to low-probability climate change risks: WTP for flood insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 82(1), pages 151-166.
    3. Surminski, Swenja & Eldridge, Jillian, 2015. "Flood insurance in England: an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," LSE Research Online Documents on Economics 66256, London School of Economics and Political Science, LSE Library.
    4. Bouchouicha, Ranoua & Martinsson, Peter & Medhin, Haileselassie & Vieider, Ferdinand M., 2017. "Stake effects on ambiguity attitudes for gains and losses," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 83(1), pages 19-35.
    5. S. Surminski & J. Aerts & W. Botzen & P. Hudson & J. Mysiak & C. Pérez-Blanco, 2015. "Reflections on the current debate on how to link flood insurance and disaster risk reduction in the European Union," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 79(3), pages 1451-1479, December.
    6. Kpegli, Yao Thibaut & Corgnet, Brice & Zylbersztejn, Adam, 2023. "All at once! A comprehensive and tractable semi-parametric method to elicit prospect theory components," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    7. Attema, Arthur E. & Brouwer, Werner B.F. & l’Haridon, Olivier, 2013. "Prospect theory in the health domain: A quantitative assessment," Journal of Health Economics, Elsevier, vol. 32(6), pages 1057-1065.
    8. W. Botzen & Jeroen Bergh, 2014. "Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(1), pages 1-33, May.
    9. Mark Schneider, 2016. "Dual Process Utility Theory: A Model of Decisions Under Risk and Over Time," Working Papers 16-23, Chapman University, Economic Science Institute.
    10. Nicolò Barbieri & Massimiliano Mazzanti & Anna Montini & Andrea Rampa, 2022. "Risk Attitudes to Catastrophic Events: VSL and WTP for Insurance Against Earthquakes," Economics of Disasters and Climate Change, Springer, vol. 6(2), pages 317-337, July.
    11. Andreas Friedl & Katharina Lima de Miranda & Ulrich Schmidt, 2014. "Insurance demand and social comparison: An experimental analysis," Journal of Risk and Uncertainty, Springer, vol. 48(2), pages 97-109, April.
    12. repec:cup:judgdm:v:3:y:2008:i:7:p:528-546 is not listed on IDEAS
    13. Botzen, W.J. Wouter & de Boer, Joop & Terpstra, Teun, 2013. "Framing of risk and preferences for annual and multi-year flood insurance," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 357-375.
    14. Floris Heukelom, 2007. "Who are the Behavioral Economists and what do they say?," Tinbergen Institute Discussion Papers 07-020/1, Tinbergen Institute.
    15. Swenja Surminski & Jillian Eldridge, 2014. "Flood insurance in England � an assessment of the current and newly proposed insurance scheme in the context of rising flood risk," GRI Working Papers 144, Grantham Research Institute on Climate Change and the Environment.
    16. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    17. Glenn W. Harrison & J. Todd Swarthout, 2016. "Cumulative Prospect Theory in the Laboratory: A Reconsideration," Experimental Economics Center Working Paper Series 2016-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    18. Nathalie Etchart-Vincent, 2009. "The shape of the utility function under risk in the loss domain and the "ruinous losses" hypothesis: some experimental results," Economics Bulletin, AccessEcon, vol. 29(2), pages 1393-1402.
    19. Jinrui Pan & Craig S. Webb & Horst Zank, 2019. "Delayed probabilistic risk attitude: a parametric approach," Theory and Decision, Springer, vol. 87(2), pages 201-232, September.
    20. Pitthan, Francisco & De Witte, Kristof, 2021. "Puzzles of insurance demand and its biases: A survey on the role of behavioural biases and financial literacy on insurance demand," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    21. Michael H. Birnbaum & Kathleen Johnson & Jay-Lee Longbottom, 2008. "Tests of Cumulative Prospect Theory with graphical displays of probability," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3(7), pages 528-546, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:masfgc:v:18:y:2013:i:2:p:229-244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.