SRA-E Lisbon 2017

Catastrophic events, such as floods, earthquakes, hurricanes, and tsunamis are rare. Yet, cumulative risk of an event occurring at least once over an extended time period can be substantial. When making decisions, people often fail to account for the fact that increased exposure will increase the cumulative risk of an event occurring at least once over. In the present work we use flooding risk as a familiar, concrete example. We assess floods cumulative risk perception, how this affects insurance decisions, and whether people’s judgments can be improved providing simple cumulative risk information. There have been attempts to understand cumulative risks in the judgment and in the choice literature, but to our knowledge no prior studies have combined direct cumulative risk judgments and choice. To do so, we use a randomized experimental designed, where participants in an online survey are assigned to either a judgment tasks or a choice task first. We find that respondents' cumulative risk judgments are well represented by a bimodal distribution, with a group that severely underestimates the risk and a group that moderately overestimates it. We also find that individuals whose judgments underestimate cumulative risks make more risk-seeking choices. Our results show that a common approach of providing information about the annual risk of an adverse event, such as a catastrophic flood, could expose public to harm they would not accept when fully informed. Instead, materials aimed at helping decision makers improve their choices should include cumulative risk information. It is cheap to provide this information to people, and such strategy has the potential to improve both the public’s perception of the cumulative risks of natural hazards, and their choices in face of uncertain outcomes.