Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [149]
1 Our discussion of probability neglect draws on Sunstein (2002). Thanks to Erwann Michel-Kerjan, Laura Malick, Chris Robert, Paul Slovic, Ngoc Anh Tran, Adrian Vermeule, the participants in the Irrational Economist conference, and others for valuable discussions.
2 The converse is also true. If emotions lead to the neglect of probabilities, there will be insufficient response to a given reduction in probability for high-probability risks (“I’m sure it’s going to happen anyway”).
3 When the risk is imposed by malicious people, there is often a negative externality associated with the precautions taken by any individual. Those who went to Virginia to fill up made it more dangerous for D.C. fillers. When few citizens walk in an urban area at night, those who still walk find such activity more dangerous.
4 We found similar results in a revised version of the electric shock experiment (Sunstein and Zeckhauser, 2008). There was no significant difference between what people would pay to eliminate a 1 percent chance of a shock and a certain shock.
5 An alternative explanation is that individuals demand substantial compensation for their outrage, and that such compensation is both fairly independent of the probability and large relative to the compensation for risk. Note that efforts to communicate the meaning of differences in risk levels by showing comparisons to normal risk levels reduced the effect of outrage, but only modestly so. Outrage had nearly the same effect as a 2,000-fold increase in risk (Johnson et al.,1993). Did this information provision improve cognitive uptake directly, or indirectly because it dampened the outrage? Further experiments will be required to tell.
6 This should bring to mind a component of the embeddedness phenomenon known from contingent valuation surveys. If seals are appealing and easily visualized, it is not surprising that we might pay more to save them in an oil spill than to save all wildlife.
7 In future work, we expect to examine the complementary concept of payoff neglect: When emotions run high, the size of potential losses will tend to be slighted. The emotion may be stimulated by anger directed at the source of the risk, or merely by a vivid description of the risk itself, apart from its magnitude.
Chapter 16 Pauly: Dumb Decisions or as Smart as the Average Politician?
1. Here is the technical explanation: The optimal deductible is determined by comparing the marginal decrease in the risk premium—what you would be willing to pay to reduce risk over and above the value of the benefits you expect to receive—with the marginal increase in the loading cost, both of which are associated with decreasing the size of the deductible. For example, suppose you have insurance with a $200 deductible, a total premium of $1,300, and a loading percentage of 30 percent. Also suppose that insurance with a $100 deductible sells for $1,365. This means that in the second case, the insurer charges you an additional $50 plus $15 loading cost (30 percent of $50) to decrease your deductible from $200 to $100. Probably many people, if they thought about it this way, would not want the low deductible policy: It increases their wealth by only $100 when a loss occurs, and they are paying $65 extra to avoid that chance. If you were a very risk-averse person and said that you would be willing to pay that penalty, we could then consider whether you would be willing to pay a penalty of the same proportion to cut your loss from $100 to $50. Eventually the loss would be of small enough consequence that you would not pay extra to be protected against it. In technical terms, beginning with a zero deductible, the marginal risk premium starts out at zero (because wealth is the same in all states with full coverage) but increases in absolute value as the deductible and the potential loss exposure grow. Loading, in contrast, is a constant proportion of expected benefits; it always costs something more to protect against any additional risk. At some point a higher deductible would