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Dynamic Endogenous Risks & Non-Expected Utility Behavior

Ranjan, Ram
Shogren, Jason F.
Abstract
Description
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.
Date
2009-01-01
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Publisher
University of Wyoming. Libraries
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Keywords
Self-insurance , Self-Protection , Perception , Probability Weighting , Risk Resilience , Business
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