Journal of Risk and Uncertainty

, Volume 40, Issue 2, pp 181–196 | Cite as

Do people respond to low probability risks? Evidence from tornado risk and manufactured homes

  • Daniel Sutter
  • Marc Poitras


Whether people perceive and respond to low-probability natural hazards is a research question of considerable policy relevance. We obtain evidence by considering the response of housing choice to tornado risk for manufactured homes. The vulnerability of manufactured housing, combined with its growing share of the U.S. housing market, has led to proposed mandates for community shelters in mobile home parks. Expected utility theory, however, predicts that households should account for tornado risk in their housing choice. We test for an effect of tornado risk on manufactured housing demand using cross-sectional state data, as well as counties in three tornado prone states. We find that people do respond to tornado risk; our estimates indicate that each expected annual state tornado death per million residents reduces demand for manufactured homes by about 3%. The estimated quantity effect is consistent with the market studies of the price elasticity of manufactured homes.


Expected utility Tornadoes Risk perception Mobile homes Natural hazards 

JEL Classification

Q27 D81 



We thank the editor and two anonymous referees for helpful comments. An earlier draft of this paper was presented at the Southern Economics Association meetings. Harold Brooks and Brent McAloney of NOAA for supplying us with the data on tornado fatality locations.


  1. American Meteorological Society. (1997). Policy statement: Mobile homes and severe windstorms. Bulleting of the American Meteorological Society, 78(5), 850–851.Google Scholar
  2. Beron, K. J., Murdoch, J. C., Thayer, M. A., & Vijverberg, W. P. M. (1997). An analysis of the housing market before and after the 1989 Loma Prieta earthquake. Land Economics, 73(1), 101–13.CrossRefGoogle Scholar
  3. Brooks, H. E., & Doswell III, C. A. (2002). Deaths in the 3 May 1999 Oklahoma City tornado from a historical perspective. Weather and Forecasting, 17, 354–61.CrossRefGoogle Scholar
  4. Brookshire, D. S., Thayer, M. A., Tschirhart, J., & Schulze, W. D. (1985). A test of the expected utility model: Evidence from earthquake risks. Journal of Political Economy, 93(2), 369–389.CrossRefGoogle Scholar
  5. Camerer, C. F., & Kunreuther, H. (1989). Decision processes for low probability events: Policy implications. Journal of Policy Analysis and Management, 8(4), 565–592.CrossRefGoogle Scholar
  6. Carbone, J. C., Hallstrom, D. G., & Smith, V. K. (2006). Can natural experiments measure behavioral responses to environmental risks? Journal of Environmental Economics and Management, 33(3), 273–292.Google Scholar
  7. Dash, N., & Gladwin, H. (2007). Evacuation decision making and behavioral responses: Individual and household. Natural Hazards Review, 8(3), 69–77.CrossRefGoogle Scholar
  8. De Alessi, L. (1996). Error and bias in benefit-cost analysis: HUD’s case for the wind rule. Cato Journal, 16(1), 129–147.Google Scholar
  9. Golden, J. H., & Snow, J. T. (1991). Mitigation against extreme windstorms. Reviews of Geophysics, 29(4), 477–504.CrossRefGoogle Scholar
  10. Hallstrom, D. G., & Smith, V. K. (2005). Market responses to hurricanes. Journal of Environmental Economics and Management, 50(3), 541–561.CrossRefGoogle Scholar
  11. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263–292.CrossRefGoogle Scholar
  12. Krantz, D. H., & Kunreuther, H. C. (2007). Goals and plans in decision making. Judgment and Decision Making, 2(3), 137–168.Google Scholar
  13. Kunreuther, H. (1978). Disaster insurance protection: Public policy lessons. New York: Wiley.Google Scholar
  14. Kunreuther, H. (1996). Mitigating disaster losses through insurance. Journal of Risk and Uncertainty, 12, 171–187.CrossRefGoogle Scholar
  15. Kunreuther, H., & Kleffner, A. (1992). Should earthquake mitigation measures be voluntary or required? Journal of Regulatory Economics, 4, 321–335.CrossRefGoogle Scholar
  16. Kunreuther, H., & Pauly, M. (2004). Neglecting disaster: Why don’t people insure against large losses? Journal of Risk and Uncertainty, 28(1), 5–21.CrossRefGoogle Scholar
  17. Kunreuther, H., Novemsky, N., & Kahneman, D. (2001). Making low probabilities useful. Journal of Risk and Uncertainty, 23(2), 103–120.CrossRefGoogle Scholar
  18. MacDonald, D. N., Murdock, J. C., & White, H. L. (1987). Uncertain hazards, insurance, and consumer choice: Evidence from housing markets. Land Economics, 63, 361–371.CrossRefGoogle Scholar
  19. McClelland, G. H., Schulze, W. D., & Coursey, D. L. (1993). Insurance for low-probability hazards: A bimodal response to unlikely events. Journal of Risk and Uncertainty, 7, 95–116.CrossRefGoogle Scholar
  20. Marshall, M. I., & Marsh, T. L. (2007). Consumer and investment demand for manufactured housing units. Journal of Housing Economics, 16, 59–71.CrossRefGoogle Scholar
  21. Meeks, C. B. (1995). Manufactured Home Life. Arlington, VA: Manufactured Housing Institute.Google Scholar
  22. Merrell, D., Simmons, K. M., & Sutter, D. (2005). The determinants of tornado fatalities and the benefits of tornado shelters. Land Economics, 81(1), 87–99.Google Scholar
  23. Meyer, R. J. (2006). Why we under-prepare for hazards. In R. J. Daniels, D. F. Kettl, & H. Kunreuther (Eds.), On Risk and Disaster. Philadelphia: University of Pennsylvania Press.Google Scholar
  24. Palm, R. (1998). The demand for disaster insurance: Residential coverage. In H. Kunreuther & R. J. Roth Sr. (Eds.), Paying the Price. Washington DC: Joseph Henry Press.Google Scholar
  25. Schmidlin, T., Hammer, B., King, P., Ono, Y., Miller, L. S., & Thumann, G. (2002). Unsafe at any (wind) speed? Testing the stability of motor vehicles in severe winds. Bulletin of the American Meteorological Society, 83(12), 1821–1830.CrossRefGoogle Scholar
  26. Schmidlin, T. W., Hammer, B., & Knabe, J. (2001). Tornado shelters in mobile home parks in the United States. Journal of the American Society of Professional Emergency Planners, 8, 1–15.Google Scholar
  27. Shilling, J. D., Benjamin, J. D., & Sirmans, C. F. (1985). Adjusting comparable sales for floodplain location. Appraisal Journal, 53, 429–436.Google Scholar
  28. Simmons, K. M., & Sutter, D. (2007). Tornado shelters and the manufactured home parks market. Construction Management and Economics, 25(11), 1119–1126.CrossRefGoogle Scholar
  29. Simmons, K. M., Kruse, J. B., & Smith, D. A. (2002). Valuing mitigation: real estate market response to hurricane loss measures. Southern Economic Journal, 68(3), 660–671.CrossRefGoogle Scholar
  30. Smith, V. K., Carbone, J. C., Pope, J. C., Hallstrom, D. G., & Darden, M. (2006). Adjusting to natural disasters. Journal of Risk and Uncertainty, 33(1/2), 37–54.CrossRefGoogle Scholar
  31. Spreyer, J. F., & Ragas, W. R. (1991). Housing prices and flood risk: An examination using spline regression. Journal of Real Estate Finance and Economics, 4, 395–407.Google Scholar
  32. Vella, F. (1993). A simple estimator for simultaneous models with censored endogenous regressors. International Economic Review, 34(2), 441–457.CrossRefGoogle Scholar
  33. Viscusi, W. K., & Aldy, J. E. (2003). The value of a statistical life: A critical review of market estimates throughout the world. Journal of Risk and Uncertainty, 27(1), 5–76.CrossRefGoogle Scholar
  34. Viscusi, W. K., & Zeckhauser, R. J. (2006). National survey evidence on disasters and relief: Risk beliefs, self-interest, and compassion. Journal of Risk and Uncertainty, 33(1/2), 13–36.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of Economics and FinanceUniversity of Texas—Pan AmericanEdinburgUSA
  2. 2.Department of Economics and FinanceUniversity of DaytonDaytonUSA

Personalised recommendations