SSRI/DuPri Seminar Series ~ "Impact of a Natural Disaster on Observed Risk Aversion"

ABSTRACT: Attitudes toward risk play an important role in economic behavior, but how these attitudes change following large disruptive events remains unclear. This is largely due to persistent problems of selective exposure, mortality, and migration in these contexts. This study explores the impact of exposure to an unanticipated natural disaster, the 2004 Indian Ocean tsunami, on attitudes toward risk using exogenous variation in exposure for a sample representative of the pre-disaster population. The results suggest that personal physical exposure to the disaster and a loss of liquid assets both lead to a temporary decrease in observed risk aversion, especially for the poor. The impact increases with the intensity of exposure, as measured by post-traumatic stress experienced in the immediate aftermath. The findings suggest that post-disaster assistance programs should provide support consistent with many survivors' greater willingness to assume economic risk (i.e., business capital, job training). Seminar #4383