Extreme Weather Events Impact Risk Tolerance and Time Preferences

Abstract

Patience and risk tolerance are important determinants of far-reaching life choices that impact welfare. This study investigates the effect of extreme weather events on individuals’ risk and time preferences in Indonesia. Matching high-resolution precipitation and longitudinal survey data, the study illustrates that each additional year of low rainfall in a respondent’s location increases the probability that they are risk averse and impatient. Exploiting within-person changes in exposure to rainfall between survey waves, this study identifies novel symmetry in these results—individuals who experience worsening conditions over time are more likely to be risk averse, while those experiencing improved conditions are more risk tolerant and patient.