Valuing Protection against Low Probability,High Loss Risks: Experimental Evidence

The study investigates protective responses in low probability and high loss risk situations.Particularly, it (1) detects individual protection valuations to variations in probability versus tovariations in loss for payment decisions and choice decisions, (2) elicits the thresholdprobability in individuals’ minds that make them consider having protective measure,(3)calculates relative risk aversion. The results of the experiment indicate that as theprobability of loss and loss amount increases, individuals tend to buy/pay more for protection.They are more responsive to the variation in probabilities than to the variation in loss amountswhen they decide whether to buy the protective measure or not: choice decision. Yet, theopposite is true when they decide the amount of willingness to pay for buying the protectivemeasure: payment decision. In addition, bid expected loss values have a bimodal distribution.Consistent with previous studies, individuals (particularly women) are found to be risk aversefor low probabilities.