Dynamic endogenous risks & non-expected utility behavior

Ram Ranjan, Jason F. Shogren

    Research output: Contribution to journalArticle

    Abstract

    The theory of endogenous risk captures the idea that people self-protect and self-insure to reduce risks to human and environmental health. Herein we extend the standard static model to include the realities of (1) dynamic and multiple risks, and (2) non-expected utility (non-EU) behavior. Our results suggest both self-protection and self-insurance decrease for any one risk when cumulative dynamic risks are large and when multiple risks exist. If people are non-EU maximizers, self-protection and self-insurance also decline when they follow the conservatism heuristic (insufficient weighting of new information). In addition, if non-EU people over- and under-weight probabilities of bad states, they can invest non-linearly in self-protection and self-insurance.
    Original languageEnglish
    Pages (from-to)215-240
    Number of pages26
    JournalKorean Economic Review
    Volume25
    Issue number2
    Publication statusPublished - 2009

    Keywords

    • Self-insurance
    • Self-Protection
    • Perception
    • Probability Weighting
    • Risk Resilience

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