Natural disaster and risk preferences: evidence from Sri Lankan twins

We estimate whether risk preferences are affected by traumatic events by using a unique survey of Sri Lankan twins which contains information on individual's exposure to the 2004 Indian Ocean Tsunami, validated measures of mental health and risk preferences, and a rich set of control variables. Our estimation strategy utilizes variation in experiences within twin pairs and allows us to explore wealth shocks and/or changes in mental health as mechanisms. We find that exposure to the tsunami lead to less risk aversion, a result that is not explained by mental health.

Automated summary

We use a unique survey of Sri Lankan twins to estimate the impact of traumatic events on risk preferences. The survey includes information on individual's exposure to the 2004 Indian Ocean Tsunami, validated measures of mental health and risk preferences, and a rich set of control variables. Our findings suggest that exposure to the tsunami leads to decreased risk aversion, and this effect is not explained by changes in mental health.