Learning from Extreme Catastrophes
46 Pages Posted: 6 Sep 2017 Last revised: 17 Oct 2018
Date Written: May 1, 2018
This article studies the effects of direct and indirect loss experience of extreme catastrophes on expectations concerning the likelihood of future events by investigating the earthquake insurance take-up of Japanese households after the two costliest disasters in history. Direct loss experiences caused the strongest reactions to extreme catastrophes, whereas risk belief updates were a nationwide phenomenon. Sharing personalized information contributed to strong and persistent indirect experience effects. Investigating the effect of past quake experience on reaction to a new major quake, we find that both availability bias and representativeness help explain the effect of past loss experiences. Furthermore, the gambler’s fallacy, as proposed by Tversky and Kahneman (1971), appears to play an important role after an indirect experience with a 1000-year earthquake.
Keywords: Catastrophe, Risk Belief, Availability Heuristic, Earthquake, Insurance
JEL Classification: D12, D81, D83, G22
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