Risk Perception, Learning, and Willingness to Pay to Reduce Heart Disease Risk

The paper investigates the validity of individual perceptions of heart disease risks, and examines how information and risk perceptions affect marginal willingness to pay (MWTP) to reduce risk, using data from a stated preference survey. Results indicate that risk perceptions held before receiving risk information are plausibly related to objective risk factors and reflect individual-specific information not found in aggregate measures of objective risk. After receiving information, individuals' updates of prior risk assessments are broadly consistent with Bayesian learning. Perceived heart disease risks thus satisfy construct validity and provide a valid basis for inferring MWTP to reduce risk. Consistent estimators of the relationship of MWTP to endogenously perceived risk are developed. Estimating MWTP based on objective rather than subjective risks causes misleading inferences about benefits of risk reduction. An empirical case study shows that estimated benefits may be as much as 60-98 eic higher when estimated using individuals' heterogeneous perceptions of risk than when using aggregate estimates of objective risk. The main contributions include assessing the validity of risk perceptions and their updating, consistently estimating the relationship between MWTP and endogenously perceived risk, and demonstrating the importance of employing risk perception information for accurate benefit measurement.