Risk taking and risk learning after a rare event: Evidence from a field experiment in Pakistan

This paper investigates the impact of rare event experience and observation on risk-taking. Matching detailed individual, household, and community-level surveys with behavioral field experiment data, we are able to further illuminate the mechanisms underlying individual risk taking after natural disasters. In addition to detailed survey data, individual propensity to undertake risk was elicited under a framed experiment setting from 192 respondents in flooded and 192 respondents in non flooded villages matched using propensity data. In the context of rural Punjab, Pakistan, we find that individuals who live in areas affected by the 2010 floods do exhibit higher risk aversion but there is significant individual variation. In addition, individuals who have personal experience of floods in the flooded villages exhibit lower risk aversion pointing toward a mitigating effect of personal experience. In multiple rounds of the experiment, we also find that the change in strategy between rounds depends on the severity of losses experienced and on the number of floods previously experienced in one's lifetime. (C) 2015 Elsevier B.V. All rights reserved.