LAUSR

Abstract This paper presents a set of laboratory experiments wherein participants are exposed to simulated terrorist attacks that allow us to examine the effect of emotions on decision making. The first objective is to attempt to understand how individuals in this environment allocate resources between private insurance and public good expenditures aimed at reducing the likelihood of these attacks. The second is to develop a methodology to test proposals to deal with the public response to terrorism (e.g., new ways of communicating terrorism risk levels) in the laboratory at a lower cost than either field-based experimental studies or implementation without prior testing. We simulate a terrorist attack by imposing a financial cost on participants and by inducing negative emotions with distressing video images that incorporate very loud, unexpected explosions to create a startle response. We find that participants who respond with fear increase their support for both public measures and private insurance in response to the threat, while participants who respond with anger reduce their support for both. Our findings suggest that people purchase private insurance to address emotional as well as financial concerns, even though private insurance primarily addresses the financial loss as opposed to the negative emotions associated with the simulated attacks.