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As California's wildfire season intensifies, a growing number of residents in the state want to ban people from building in areas at greatest risk.
That's because taxpayers bear the burden of protecting homes in dangerous areas when fire breaks out—and they often help foot the bill when it's time to rebuild. A recent assessment showed that 1 in 4 Californians live in an area at "high risk" of wildfire. And people tend to want to rebuild in the same spot that was hit by a disaster.
Economist - Studies - Psychology - Decision-making - People
As a behavioral economist who studies the psychology of decision-making, I try to understand people's motivations before taking a position in a policy debate. I believe there's a better way for policymakers to achieve the same goal of getting people to avoid building in disaster-prone areas without forcing people from their homes.
In behavioral economics, there's something known as the endowment effect.
Effect - Idea - People - Things - Desire
The endowment effect is basically the idea that people overvalue things they already own. And it helps explain the common and seemingly irrational desire of many homeowners to rebuild in places at great risk of wildfire, hurricanes or other natural disasters.
Behavioral economists Daniel Kahneman, Jack Knetsch and Richard Thaler were the first to explain this effect in 1990. They conducted an experiment in which half their subjects were given a coffee mug. They asked those subjects to name the lowest price at which they'd be willing to sell their mug. They then asked those without mugs how much they would be willing to pay buy one.
Subjects - Mug - Difference - Selling - Buying
Since the subjects who received a mug were randomly chosen, there should have been little difference between the selling and buying prices, which represent how each group valued the mug.
Instead, the researchers discovered a significant gap between two groups. The median selling price, representing the people who already had mugs, was...
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