Natural Disasters and Changing Risk Preferences: Long-Run Field Evidence from Indonesia

Abstract

Whilst studies have looked at the impact of one-off exogenous events on risk preferences, few have used longitudinal field data to assess the long-run effects of cumulative exposure to shocks. This paper studies how risk preferences are shaped by the cumulative experience of natural disasters, drawing on longitudinal field data representative of the Indonesian population from 1993 to 2014. Exploiting natural disasters as natural experiments in a difference-in-difference model, this paper provides causal evidence that past disaster experience leads to decreased risk aversion over time. Heterogeneity analysis finds evidence suggestive of a risk familiarisation process, where individuals adjust their risk preference with respect to the difference between ex ante-expected and ex post-experienced disasters.