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 languageEnglish
PublisherNational Bureau of Economic Research (NBER)
DOIs
Publication statusPublished - Oct 2020

Publication series

Name
No.27988

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