The Effect of Terror on Risk Preferences

Graeber, D., Meister L., and Murray, N. (2023). “The Effect of Terror on Risk Attitudes”. (Unpublished Manuscript).

Abstract: Terrorism imposes high economic costs on the affected population. In this paper, we argue that conventional studies on the cost of terrorism lack one important channel: costly behavioural responses. We show that terrorism impacts the risk attitudes of individuals that were in the same region at the time of the attack. Based on a representative sample of the German population, we employ a staggered difference-in-differences (DiD) design that compares individuals living in counties that were affected by a terrorist attack and those that were not. Our results reveal an immediate and significant decline in individuals’ risk propensity following a terrorist attack. Moreover, we find that the emotion of happiness serves as potential mediator in the relationship between exposure to terror attacks and risk attitudes.