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The Perception of Lethal Risks - Evidence from a Laboratory Experiment

Author

Listed:
  • Tilman Br�ck

    (Stockholm International Peace Research Institute (SIPRI), Institute for the Study of Labor (IZA) and International Security and Development Center (ISDC))

  • Manuel Schubert

    (University of Passau)

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

  • Tilman Br�ck & Manuel Schubert, 2014. "The Perception of Lethal Risks - Evidence from a Laboratory Experiment," HiCN Working Papers 188, Households in Conflict Network.
    • Handle: RePEc:hic:wpaper:188
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    References listed on IDEAS

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    1. Sunstein, Cass R, 1997. "Bad Deaths," Journal of Risk and Uncertainty, Springer, vol. 14(3), pages 259-282, May-June.
    2. 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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    5. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    6. 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.
    7. 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.
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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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