Risk Aversion Parameters before and after the Great East Japan Earthquake

Abstract

Rare catastrophic events have the possibility of altering people's behavior in risk-related decision making, which we should be able to capture as estimated changes in basic preference parameters. Whether large-scale natural disasters such as the Great East Japan Earthquake make people more (or less) risk averse would be of great interest to many social scientists.

The purpose of this paper is to provide empirical evidence on (1) whether catastrophic events affect the level of the absolute risk aversion (ARA) parameter, and (2) whether such effects on ARA (if any) are related to various individual characteristics such as age, gender, education, area of residence, financial literacy and financial assets. Our data set consists of panel data of 342 individuals measured both before and after the Great East Japan Earthquake. Our results suggest that the effects of the Earthquake on the level of the ARA parameter are not significant overall, although individuals with low financial literacy may have a weak tendency to increase their ARA in response to the Earthquake. We also find that the effects of wealth on ARA, surprisingly, have opposite signs depending on their level of financial literacy.