How does risk preference change under the stress of COVID-19? Evidence from Japan

In this study, we investigated whether the risk preference systematically changed during the spread of COVID-19 in Japan. Traditionally, risk preference is assumed to be stable over one’s life, though it differs among individuals. While recent studies have reported that it changes with a large event like natural disasters and financial crisis, they have not reached a consensus on its direction, risk aversion, or tolerance. We collected panel data of Japanese individuals in five waves from March to June 2020, which covered the period of the first cycle when COVID-19 spread rapidly and then dwindled. We measured risk preference through questions on the willingness to pay for insurance. The main results are as follows: First, people became more risk tolerant throughout the period; and second, people were more averse to mega risk than moderate risk, with the former correlating more strongly with the individual’s perception of COVID-19. The first result may be interpreted as “habituation” to repeated stress, as is understood in neuroscience.