How do people respond to small probability events with large, negative consequences?

Martin Eichenbaum; Miguel Godinho de Matos; Francisco  Lima; Mathias Trabandt; Sergio Rebelo

doi:10.3386/w27988

How do people respond to small probability events with large, negative consequences?

Martin Eichenbaum, Miguel Godinho de Matos, Francisco Lima, Mathias Trabandt, Sergio Rebelo

Research output: Working paper

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Abstract

We study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.

Original language	English
Publisher	National Bureau of Economic Research (NBER)
DOIs	https://doi.org/10.3386/w27988
Publication status	Published - Oct 2020

Publication series

Name
No.	27988

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10.3386/w27988Licence: Unspecified

29378852Final published version, 1.43 MBLicence: Unspecified

http://hdl.handle.net/10400.14/32950Licence: Unspecified

CUBE: Católica Lisbon Research Unit in Business and Economics
Machado, F., Aranda, A. M., Costa, A. I. D. A., Martins, A. P., Bernard, A., Fidalgo, A., Reis, C., Abecassis-Moedas, C., Santos, C., Tran, D., Fernandes, D., Bonfim, D., Schliephake, E., Kalogirou, F., Reis, F., Santos, F., Machado, F., Sguera, F., Cerqueiro, G., Reis, H., Barreto, I., Silva, J., Salvado, J. C., Neves, J. C. D., Gijsbrechts, J., Stahl, J., Guedes, J. C., Faias, J., Wagner, L., Correia, I. H., Saldanha, M. F., Fontes, J. C., Modesto, L., Meira, M., Matos, M. G. D., Gouveia, M., Kozeniauskas, N., Bertani, N., Couzoff, P., Barroso, P., Encarnação, P., Raposo, P. M., Teles, P., Bastos, W., Bohnsack, R., Vale, R. C. D., Ferreira, R., Lloyd-Braga, T., Ramus, T., Colaço, V. H., Cavicchini, A., Balderrama, P. A. P., Pieters, F. G. M., Pinto, F. A. G. D. L. S., Colaço, V. H. & Teixeira, Z. V.
1/01/20 → 31/12/23
Project: Research
CEEC Institucional 2018 - CUBE - Docente 2
Matos, M. G. D.
24/07/19 → 23/07/25
Project: Research

Cite this

@techreport{6b68025ad60b4538ba4dc26c34c87cde,

title = "How do people respond to small probability events with large, negative consequences?",

abstract = "We study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.",

author = "Martin Eichenbaum and Matos, {Miguel Godinho de} and Francisco Lima and Mathias Trabandt and Sergio Rebelo",

year = "2020",

month = oct,

doi = "10.3386/w27988",

language = "English",

publisher = "National Bureau of Economic Research (NBER)",

number = "27988",