Eichenbaum, Martin S. <br/><br/>
How do People Respond to Small Probability Events with Large, Negative Consequences? / 
Martin S. Eichenbaum, Miguel Godinho de Matos, Francisco Lima, Sergio Rebelo, Mathias Trabandt. 
 - Cambridge, Mass.  National Bureau of Economic Research  2020. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w27988 .
 - Working Paper Series (National Bureau of Economic Research)  no. w27988. .
<br/><br/> October 2020. 
<br/><br/> We study how people react to small probability events with large negative consequences 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 expenditures 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. 
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