Economics Seminar (Empirical/Env.): Wesley Howden, University of Arizona

Sunset over McClelland Hall
Empirical / Environmental Economics

When

3:30 p.m. to 4:30 p.m. Sept. 22, 2021

Where

McClelland Hall 128

Wesley Howden, Arizona Institutes for Resilience Postdoctoral Research Associate, University of Arizona.

Risk Preference Adaptation to Climate Change

How do individual risk preferences adapt to climate change? To study this question, we start by building a model of risk preference adaptation. In our model, a Bayesian agent is exposed to unavoidable, exogenous background risk with an unknown mean and unknown variance, and learns about its moments from personal experience. As the agent's beliefs about the background risk evolve, their preferences over endogenous risks adapt in turn. We test the predictions of our model in two large, longitudinal surveys from Indonesia and Mexico, by linking within-person, long-run changes in elicited risk preferences to data on individual lifetime experiences of climate change. In line with our model's predictions, we find that (1) increases in the experienced mean of heat and precipitation in both settings induce significant decreases in measured risk aversion; (2) increases in the variance of heat in Indonesia and the variance of precipitation in Mexico lead to significant increases in measured risk aversion; (3) the magnitude of the variance effect is 0.7-1.6 times that of the mean effect, indicating that perceptions of uncertainty are of first-order importance; and (4) increases in measured risk aversion correlate with decreases in risk-taking behavior in the domains of migration and smoking. Building on recent advances in welfare economics, in the final part of the paper we develop a new method for estimating whether observed risk preference changes are, in fact, adaptive. Using our method we find that in our sample this is the case, with climate-change-induced risk preference changes increasing collective welfare by approximately one percentage point.

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