The Waterfall Illusion, and How Prior Exposure to Extreme Risk Distorts Risk Perception

Time: 1.00 - 2.00pm Venue: Room 3.21, Old Building, LSE (map)
Speaker: Elise Payzan-LeNestour (UNSW Australia Business School)
Seminar Title: The Waterfall Illusion, and How Prior Exposure to Extreme Risk Distorts Risk Perception
Abstract: How do individuals perceive risk? We address this question through the neuroscience theory of normalization, which predicts that after prolonged exposure to extreme risk, risk perception is distorted in a systematic and pervasive fashion. Using a combination of field and laboratory data, we provide strong evidence for this prediction — people systematically underestimate risk after prolonged exposure to high risk, resulting in distortions of prices in a sophisticated and liquid market.