Journal of Risk and Uncertainty

, Volume 45, Issue 1, pp 25–50 | Cite as

Failing to learn from experience about catastrophes: The case of hurricane preparedness

Article

Abstract

This paper explores the question of whether there are inherent limits to our ability to learn from experience about the value of protection against low-probability, high-consequence, events. Findings are reported from two controlled experiments in which participants have a monetary incentive to learn from experience making investments to protect against hurricane risks. A central finding is that investments display a short-term forgetting effect consistent with the use of reinforcement learning rules, where a significant driver of investments in a given period is whether storm losses were incurred in the precious period. Given the relative rarity of such losses, this reinforcement process produces a mean investment level below that which would be optimal for most storm threats. Investments are also found to be insensitive to the censoring effect of protection itself, implying that the size of experienced losses—rather than losses that are avoided—is the primary driver of investment decisions.

Keywords

Decision making under uncertainty Learning from experience Natural disasters 

JEL Classification

D8 D9 Q5 

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.The Wharton SchoolUniversity of PennsylvaniaPhiladelphiaUSA

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