"How do People Respond to Small Probability Events with Large, Negative Consequences?"
We study how people react to small probability events with large negative conse-
quences using the outbreak of the COVID-19 epidemic as a natural experiment. Our
analysis is based on a unique administrative data set with anonymized monthly expen-
ditures at the individual level. We find that older consumers reduced their spending by
more than younger consumers in a way that mirrors the age dependency in COVID-19
case-fatality rates. This differential expenditure reduction is much more prominent for
high-contact goods than for low-contact goods and more pronounced in periods with
high COVID-19 cases. Our results are consistent with the hypothesis that people react
to the risk of contracting COVID-19 in a way that is consistent with a canonical model
of risk taking.
Here is a link to a preliminary draft: