Risk-Taking Behavior in the Wake of Natural Disasters

We study whether natural disasters affect risk-taking behavior exploiting geographic variation
in exposure to natural disasters. We conduct standard risk games (using real money) with
randomly selected individuals in Indonesia and find that individuals who recently suffered a
flood or earthquake exhibit more risk aversion than individuals living in otherwise like villages.
The impact persists for several years, particularly if the disaster was severe. Some, but not
all, of this effect is due to income losses. While we cannot rule out fundamental changes in
risk preferences, data on subjective beliefs of the probability of a disaster occurring and the
expected severity of such a disaster suggest that changes in perceptions of background risk
are driving the more risk-averse behavior we observe. We show that access to insurance can
partly offset this effect. Finally, we relate the observed experimental behavior to the
propensity of respondents to take risks in their daily lives and show that an increase in risk aversion
has important implications for economic development.