Natural Disasters and the Intangibility of Risk Reduction: Theory and Experimental Evidence

with Todd Cherry and George Loewenstein

Work in Progress

In this paper, we study how the tangibility of disaster outcomes influences willingness to invest in the collective mitigation of endogenous risk. We build a simple model in which contributions lower endogenous risk but not exogenous risk, and where feedback about the source of prior realized losses shifts beliefs about the efficacy of mitigation efforts. We test the model in a 2 x 2 laboratory experiment varying the contribution mechanism (continuous mitigation versus threshold mitigation) and whether outcomes are tangible (source revealed) or intangible (source unknown). From this experiment, we find that prior mitigation success encourages additional mitigation in future rounds. Additionally, we find that participants respond more strongly to endogenous losses compared to exogenous ones when the source is revealed. When the source of the disaster is unknown, participants reduce their mitigation contributions following losses but increase their contributions when they can observe successful mitigation efforts. These findings suggest that the avoidability and feedback jointly determine the effectiveness of prevention efforts. Policies that increase the causal attribution can encourage additional investment in prevention policies whose success would otherwise be invisible.