Author: Glenn W. Harrison,E. Elisabet Rutström and Shabori Sen

ABSTRACT. We consider theeffect of allowing for endogenous risk on behavior, in the simplest possiblelaboratory environment that allows us to identify effects on risk attitudes andsubjective beliefs. We find that risk attitudes and subjective beliefs areindeed significantly affected by the possibility that choices might alter theprobabilities in the lotteries being considered. Our design considers theevaluation of risk, and risk mitigating behavior, in a virtual environment thatreflects the risk of property destruction from a forest fire. We jointly elicitrisk attitudes, subjective beliefs and mitigating choices, and estimate a structuralmodel that allows us to identify the effects of allowing for endogeneity ofrisk. We find evidence that endogenous risk settings do cause subjects toemploy different subjective beliefs than they use in an exogenous risk setting,although risk attitudes appear stable across these settings.

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