Catastrophic Risk Perception and the Shared Burden Effect: An Experimental Study Using Prospect Theory

Abstract This study examines how individuals perceive and value low-probability, high-impact risks through a Cumulative Prospect Theory (CPT) framework. We focus on two main contributions. First, we introduce and validate an experimental measure of Catastrophic Risk Perception (CRP), derived from individual CPT parameters, capturing probability weighting and loss sensitivity. Second, we define and document a Shared Burden Effect (SBE): willingness to pay to eliminate a catastrophic loss falls when the same risk is shared collectively rather than borne individually, under identical probabilities and outcomes. We further explore how background characteristics and cognitive mechanisms shape these behaviors, distinguishing between distortions in probability perception and sensitivity to losses. Our findings shed light on how collective framing alters perceived risk severity and help explain public underinvestment in preparedness for extreme events.