Risk preferences and natural disasters: a review of theoretical and empirical themes

While a flourishing literature assesses the impact of risk perception on decision-making surrounding natural disasters, much less is known about the role of risk preferences. This chapter reviews relevant theoretical and empirical literature to highlight key themes and research opportunities. We begin by reviewing prevailing models of risk preferences and empirical methods for preference elicitation. We then examine three settings - insurance, location choice, and adaptation - to examine how risk preferences help explain natural disaster decision-making and impacts. We find risk preferences to be a key moderating variable, including that risk aversion typically leads to more insurance purchased, location in safer places, and adoption of proven adaptive technologies. We finally examine how risk preferences may also be shaped by disaster events. Our review of the interplay between risk preferences and natural disasters highlights the importance of an arguably understudied factor in mitigating disaster losses and improving societal resilience.