Chapter

Risk Beliefs and Individual Rationality

W. Kip Viscusi

in Rational Risk Policy

Published in print March 1998 | ISBN: 9780198293637
Published online November 2003 | e-ISBN: 9780191596995 | DOI: http://dx.doi.org/10.1093/0198293631.003.0002
 Risk Beliefs and Individual Rationality

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Risk beliefs often reflect systematic biases, such as the overestimation of small risks and underestimation of large risks. The prospective reference theory model explains these and other anomalies and in many instances predicts these patterns of behaviour. Precautionary behaviour is subject to a paradox since people will tend to undervalue marginal decreases in risk but will overvalue improvements that completely eliminate the risk. Risk ambiguity aversion, as reflected in the Ellsberg Paradox, affects public responses to dimly understood risks such as Mad Cow disease and many carcinogens. Many other biases in risk beliefs are evident, such as overreaction to risk increases, overestimation of risk decreases that eliminate the risk, and overestimation of highly publicized risks.

Keywords: bias; carcinogens; Ellsberg Paradox; Mad Cow disease; prospective reference theory; risk ambiguity; risk beliefs

Chapter.  7391 words.  Illustrated.

Subjects: Microeconomics

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