Comparing risk preferences over financial and environmental lotteries
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This paper investigates whether preferences over environmental risks are best modeled using probability-weighted utility functions or can be reasonably approximated by expected utility (EU) or subjective EU models as is typically assumed. I elicit risk attitudes in the financial and environmental domains using multiple-price list experiment. I examine how subjects’ behavioral, attitudinal, and demographic characteristics affect their probability weighting functions first for financial risks, then for oil-spill risks. I find that most subjects tend to overweight extreme positive outcomes relative to expected utility in both the environmental and financial domains. Subjects are more likely to overemphasize low probability, extreme environmental outcomes than low probability, extreme financial outcomes, leading subjects to offer more support for mitigating environmental gambles than financial gambles with the same odds and equivalent outcomes. I conclude that EU models are likely to underestimate subjects’ willingness to pay for environmental cleanup programs or policies with uncertain outcomes.
KeywordsEnvironmental risk Cumulative prospect theory Probability weighting Domain specificity
JEL ClassificationQ51 D03 D81
I would like to thank the University of Nevada, Las Vegas for supporting this research through a sabbatical leave grant. I would also like to thank Sonja Kolstoe for her data collection efforts and W. Douglass Shaw for inspiring this research question.
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