CREATE Researchers Study Gain-Loss Framing to Nudge Homeowner Mitigation and Insurance Purchase for Natural Disasters

CREATE study finds that a gain-frame, compared to a more typical loss-frame, is more likely to lead to risk-averse homeowner decisions to mitigate and purchase insurance for floods and hurricanes, but not for earthquakes.

Promoting homeowners’ preparation for natural disasters is a critical component of building community resilience. Adoption of protective actions by individual homeowners could reduce the risk of injury and damage to property; however, despite extensive public education programs, numerous studies report that households still are under-prepared for natural disasters. The effectiveness of gain-loss framing to nudge risk-averse decision-making has been demonstrated across several domains, yet gain-loss framing natural disaster preparation has not been tested or applied for individual or household-level decisions. A behavioral experiment (N=1,840) was conducted by former CREATE Research Assistant Dr. Mengtian (Jessica) Zhao and CREATE Associate Director and Senior Research Fellow Dr. Richard John to test whether gain-loss framing can be used to nudge homeowner risk mitigation and insurance purchase decisions.

It is often assumed that providing civilians with more detailed information about hazards and mitigation alternatives would encourage protective action and reduce disaster-related damages; however, research has demonstrated that this assumption is ill-founded in the context of natural disaster preparation. In one study, New Zealand residents susceptible to volcanic hazards demonstrated poor knowledge of risk mitigation behaviors related to volcano eruptions, even after multiple local campaigns about volcano hazards had been conducted. Furthermore, knowledge about mitigation behavior did not correlate with the adoption of protective actions. Similarly, many studies also reported that adoption of protective actions remained low, despite considerable efforts on public natural disaster education.

The objective of this research was to investigate whether manipulation of the decision frame for taking protective action influences the likelihood of adopting mitigation measures in the context of natural hazards. In their pioneering book Nudge, Thaler and Sunstein proposed the concept of “choice architecture,” which refers to the act of organizing the context in which the decision is made so that the optimal option for the decision-maker appears more appealing, thereby helping decision-makers choose better options. The current project focuses on utilizing one particular manipulation of choice architecture, gain-loss framing, as a way of nudging people to adopt protective actions.

Gain-loss framing effects first originated from Kahneman and Tversky’s concept of a reference point in prospect theory. A decision frame is defined as the “conception of acts, outcomes, and contingencies” associated with the decision-maker’s choice. Prospect theory provides an account for understanding decision-making processes involving risks, and postulates that for a decision under uncertainty, when potential losses or negative consequences of a decision are emphasized (defined as a loss frame), people tend to be risk-seeking, whereas when the potential benefits of positive consequences of a decision are emphasized (defined as a gain frame), people tend to be risk averse. 

In the CREATE study, two variables were manipulated: message frame (gain vs. loss) and risk mitigation (physical remediation vs. insurance purchase). Gain-loss framing is manipulated by shifting the reference point, and risk mitigation vs. insurance purchase is manipulated by changing the scenario descriptions. Risk-mitigation methods described in the decision vignettes were gathered from the NOAA’s recommendations. Respondents were randomly assigned into one of the four possible combinations of decision frame (gain vs. loss) and type of risk mitigation (physical remediation vs. insurance purchase). 

The decision vignette involves a hypothetical scenario of selling a home due to job relocation. In the case of hurricanes, since the property is located in a natural disaster-prone area and recent forecasts predicted an upcoming hazard on the way, the homeowner in this scenario faces the choice of whether or not to invest in storm shutters or hurricane insurance. The time-horizon for the mitigation decision is set at one year, which allows specification of meaningful probabilities of loss from the hurricane hazard over a specific time period. This particular vignette allowed realistic manipulation of both risk mitigation strategy (physical mitigation vs. insurance) and frame (gain vs. loss). 

Results demonstrated that gain-loss framing effects are effective in nudging homeowners toward risk-averse preferences for insurance purchases for all three natural disasters (floods, hurricanes and earthquakes), and for physical remediation investments for floods and hurricanes, but not for earthquake remediation. The lack of framing effect for earthquake mitigation might be a result of an overall disbelief in the efficacy of earthquake-retrofitting measures. Results also suggest that homeowners from earthquake- and hurricane-prone states are more likely to adopt retrofitting as a precautionary measure, yet participants at risk for floods did not exhibit any preference for insurance vs. physical remediation. Overall, results from the current experiment offer insights for policymakers, suggesting that the effectiveness of gain-loss framing and preference for risk mitigation vs. insurance purchase is dependent on the disaster context. With respect to risk mitigation vs. insurance purchase, homeowners at risk to experience hurricanes and earthquakes preferred to structurally mitigate than to purchase insurance, but this preference was not evident for those at risk for floods.  

This study provides empirical evidence regarding the effects of individual-level gain-loss framing on mitigation and insurance purchase decisions for natural disasters. Findings from the experiment: 

1. Provide empirical evidence supporting the hypothesis that gain-loss framing effects previously reported at the policy or organizational level do generalize to gain-loss framing effects for individual and household decisions; 

2. Demonstrate the generalizability and robustness of gain-loss framing effects across different natural disasters and both physical mitigation and insurance purchase decisions; 

3. Highlight the integral role of context dependency in framing mitigation decisions, indicating that policy makers should consider unique attributes of each natural disaster and tailor the decision frame accordingly in order to nudge individual decision makers to more prudent, risk-averse options. 

A paper on the findings of the research, titled “Building Community Resilience Using Gain-Loss Framing to Nudge Homeowner Mitigation and Insurance Decision-making," was part of the proceedings at the 2021 Hawaii International Conference on System Sciences (HICSS-54), where it received the Best Paper Award (Digital Government Track). It can be downloaded here.