Abstract
We investigate whether households’ decisions for risk-hedging of rare disasters depend on their past experiences. Japanese earthquake experience offers a natural subject to study risk perception because such an event is exogenous and cannot be predicted or controlled. Moreover, natural disasters are local events, such that we can use geographic locations to proxy for earthquake experience from different aspects. Using data from a survey on Japanese households, we find that households who have previously experienced catastrophic earthquakes are more likely to purchase and allocate a larger fraction of their financial wealth to life and property insurance. Further results suggest that the experience effect works by disproportionately affecting households’ future beliefs, rather than their risk attitudes.
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