The goal of the study is to explore the effect of risk perception on willingness-to-pay for protection in low-probability, high-consequence events by conducting an economic experiment. The laboratory setting will enable us to detect individual inconsistent perceptions of low-probability, high-consequence hazards and their responses to possible loss at various probability levels in a controlled environment.

In the design of the experiment, the low probability (probability of exposure to risk) is determined by the numbers the subjects are asked to define in twelve decisions. The probabilities are as follows: 0.001, 0.002, 0.005, 0.010, 0.050, and 0.100. The high consequence (severity), however, is a monetary loss of $10 or $20 out of $25. In that respect, the amount of money loss is $10 for six decisions and $20 for the rest of the six decision situations. BDM setting is used to reveal subjects’ willingness-to-pay for protecting themselves from possible loss at various probability levels. In addition, random- selection method is used to determine which decision (out of twelve) will be taken into account for the experimental process in order to control for wealth effects. Each individual’s relative degree of risk aversion is determined before the experiment by a preliminary questionnaire.

Besides the effect of perceived risk (probability and severity of risk separately) on people’s actions to risk is expected to be detected. We will examine the inconsistent perceptions of low-probability and high-consequence risks and the influence of risk attitudes and some socioeconomic variables on individual behaviors.

Co-author Jamie Brown Kruse