Getting used to risks: reference dependence and risk inclusion

Arbeitspapier

Experimental and field evidence show that people perceive and evaluate new risks differently from risks that are common. In particular, people get used to the presence of certain risks and become less eager to avoid them. We explain this observation by including risks in the reference states of individuals, which requires a more general concept of the reference state than has previously been considered in the literature. We find two effects. First, the inclusion of the risk in the reference state changes its evaluation. A risk being present on the market induces a selfenforcing process of increasing acceptance of this risk without any new information becoming available or people's tastes changing. We term this the risk inclusion effect. Second, a risk with lower inherent (reference-independent) utility may be preferred to a risk with higher inherent utility if individuals are more used to accepting the former than the latter. This leads to inefficient decisions if habituation is seen as contributing less to welfare than inherent utility. Both effects have implications for the optimal regulation of risks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2005,036

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Health: Government Policy; Regulation; Public Health
• Subject: habituation ; risk perception ; reference-dependent preferences ; WTA/WTP disparity ; health risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Matthey, Astrid
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/25049
• Last update: 10.03.2025, 11:45 AM CET