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Title:Getting used to risks: reference dependence and risk inclusion PDF Logo
Authors:Matthey, Astrid
Issue Date:2005
Series/Report no.:SFB 649 discussion paper 2005,036
Abstract:Experimental and field evidence show that people perceive and evaluate new risks differently from risks that are common. In particular, people get used to the presence of certain risks and become less eager to avoid them. We explain this observation by including risks in the reference states of individuals, which requires a more general concept of the reference state than has previously been considered in the literature. We find two effects. First, the inclusion of the risk in the reference state changes its evaluation. A risk being present on the market induces a selfenforcing process of increasing acceptance of this risk without any new information becoming available or people's tastes changing. We term this the risk inclusion effect. Second, a risk with lower inherent (reference-independent) utility may be preferred to a risk with higher inherent utility if individuals are more used to accepting the former than the latter. This leads to inefficient decisions if habituation is seen as contributing less to welfare than inherent utility. Both effects have implications for the optimal regulation of risks.
Subjects:habituation
risk perception
reference-dependent preferences
WTA/WTP disparity
health risk
JEL:D81
I18
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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