Learning from extreme catastrophes

This article studies the effects of direct and indirect loss experience of extreme catastrophes on expectations concerning the likelihood of future events by investigating the earthquake insurance take-up of Japanese households after the two costliest disasters in history. Direct loss experiences caused the strongest reactions to extreme catastrophes, whereas risk belief updates were a nationwide phenomenon. Sharing personalized information contributed to strong and persistent indirect experience effects. Investigating the effect of past quake experience on reaction to a new major quake, we find that both availability bias and representativeness help explain the effect of past loss experiences. Furthermore, the gambler's fallacy, as proposed by Tversky and Kahneman (Psychological Bulletin 76(2), 105–110, 1971), appears to play an important role after an indirect experience with a 1000-year earthquake.