Preamble to Experiment
WELCOME, you are about to participate in a series of market sessions on risk and decision-making. While there is the opportunity for you to earn real money from your decisions, we ask that you take on the role of a household decision-maker trying to protect the value of an asset (think of it as the market value of your home).
We are interested in how people make household decisions about buying wildfire insurance for their home, and paying for risk reduction activities, when they confront the possibility of wildfires in their neighborhood or area. Experts refer to these areas as the Wildland-Urban Interface. Areas with different types of characteristics may confront different degrees of wildfire risk, which can be coarsely classified as High, Moderate and Low.
Wildfires can also be of different types. For our purposes today, we will mimic the possibility of wildfires with random draws from a bingo cage with known chances. We can think of two types of wildfires. Small-scale fires happen more frequently, but have less potential for causing losses in asset values. They also reduce the probability of catastrophic fires in the future by removing fuels. Larger-scale fires happen less frequently but have greater potential for catastrophic losses in the asset value of people’s homes.
Buying insurance ahead of time compensates you for losses in asset value that occur if a wildfire does happen. How much compensation depends on how much insurance you buy. Paying for risk reduction activities ahead of time affects the size of the losses in asset value that occur if a wildfire does happen. Expenditures on private risk reduction activities only affect your own home – examples may be retrofitting your home (type of roof, etc.), or creating a “defensible space” around your home by removing flammable brush that abuts structures. Expenditures on public risk reduction activities may affect your home and those of others – examples may be purchasing fire-fighting equipment or thinning nearby forests to reduce fuels. Public risk reduction activities may be done by the U.S. Forest Service, and they may be done by local public agencies and neighborhood associations.
You will be presented with a series of decisions on purchasing insurance and/or paying for risk reduction activities. There are no right or wrong answers. You will participate in multiple periods; think of each period as a fire season or year for household decision-making. Each participant has been assigned to a computer terminal where you can enter your decisions. All decisions will be conducted on the computer, and your decision in one period on whether and how to protect your asset (your home value) is linked to that in the next. After all participants enter their decision in each period a random draw will be made for the possibility of a wildfire.
In all periods the opportunity to buy insurance will be available, but the opportunity to pay for different types of risk reduction activities (private and public) will change. In early rounds only insurance will be offered, and then as we proceed different types of risk reduction activities will become available.
To make your decision-making more realistic, each participant has been given two maps of the same area. These are actual maps of the East Mountains Area of the Sandia Mountains, near Albuquerque and in Bernalillo County, New Mexico. This is meant to represent only one of the many areas in New Mexico and the West that confront the possibility of wildfires. As shown by the black dot below your identification number, each participant is assigned a specific home location in the East Mountains.
Map 1 shows the East Mountains and identifies the Cibola National Forest lands and surrounding urban areas. Areas in red are National Forest lands that are classified as part of the Wildland-Urban Interface Zone. Map 2[1] shows the East Mountains and identifies the areas of different fire risk conditions (High, Moderate and Low), as recently characterized by the U.S Forest Service. Spend a few minutes familiarizing yourself with the maps, locating (a) your home-the black dot below the identification number; (b) your neighborhood-defined by the circle surrounding your home and identification number, and (c) determining in which fire risk class your home is located-red for high, yellow for medium, and blue for low.
Also, before we begin, let me direct your attention to the tray containing purple, orange, and white bingo balls. The significance of these bingo balls will be explained in the instruction, but for now, I would like a volunteer to verify that the tray contains 30 white balls, 15 orange balls, and 5 purple balls. We will have one of you verify this distribution before we put the balls in the bingo cage.
More detailed instructions about this experiment are provided on the computer screen as you proceed. Please now click on the “Proceed” button to begin the experiment.