endogenous risk, virtual reality, beliefs
Risk is endogenous when an individual is able to undertake mitigation or self protection actions that reduce the risk that he faces. Most risky environments studied in economics involve endogenous risk. This dissertation studies the conceptual and behavioral implications of introducing endogeneity in the controlled environment of the laboratory. The dissertation consists of three different experiments designed to examine how endogeneity affects risk attitudes and risk perceptions in simple experimental set ups. All three experiments employ a virtual reality scenario where the subject is able to form his own beliefs, based on naturalistic cues provided by the virtual reality experience. In the first experiment, a 'short run' individual experiment, subjects experience several forest fires that allow them to form beliefs about the probability of a house in the simulated forest being destroyed by fire. The evidence suggests that endogenous risk settings do cause subjects to employ different subjective beliefs than they use in an exogenous risk setting, although risk attitudes appear stable across these settings. Typically, the risk of natural disaster in any area is very small, and an adverse event like a forest fire occurs only once in a couple of decades. This has implications for self-protection expenditure where risk is endogenous. A 'long run' individual experiment with several rounds of decision making allows the estimation of subjective beliefs about the risk of the property burning when a fire may occur. This design allows for the study of the effect of an actual experience of forest fire on a subject's beliefs. Several mitigation options are collective in nature and require group contributions for the self-protection action to be provided. In an extension of the long run design, we study the effect of an actual experience of fire on beliefs when the risk is faced by a group rather than an individual. This framework also allows us to compare behavior in a public goods game involving risk, with the standard public goods game.
Doctor of Philosophy (Ph.D.)
College of Business Administration
Length of Campus-only Access
Doctoral Dissertation (Open Access)
Sen, Shabori, "Behavioral Response To Endogenous Risk In The Laboratory" (2010). Electronic Theses and Dissertations. 4243.