Wharton Research Scholars

Document Type

Journal Article

Date of this Version

April 2004

Abstract

This paper examines the effect that past experiences have on the decision to invest in protective measures. These protective measures serve to mitigate damages should the event occur again. It shows that three past experiences with negative consequences - Hurricane Andrew, the Aspen Wildfire, and the SoBig.F computer virus - have all served to increase investment in protective measures. Additionally, it uses an example of data analysis on a hurricane simulation game to show that these effects are not always pervasive and offers reasons for why this might be. Overall, changes in investment seem to be greatest when the value of the losses is high and media coverage is significant. Some policy implications to correct the problem of underinvestment before the occurrence of an event include greater government interaction and exploration of private sector solutions to increase the incentives for individuals to invest in protection.

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Date Posted: 29 September 2006

This document has been peer reviewed.