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Comparing risk preferences over financial and environmental lotteries

Mary Riddel
Journal of Risk and Uncertainty
Vol. 45, No. 2 (October 2012), pp. 135-157
Published by: Springer
Stable URL: http://www.jstor.org/stable/43550154
Page Count: 23
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Comparing risk preferences over financial and environmental lotteries
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Abstract

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 fonctions 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.

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