The purpose of this study is to investigate the effect of failure experience. This study builds the two-period model including the educational investment and failure experience by answering the following three questions. First, if the effect of failure experience exists, how does the investment change in comparison with the non-existing case? Second, what is the effect of the initial wealth in relation to the effect of failure experience? Third, what is the situation where the effect of failure experience is large? The results of the model are as follows: First, if the effect of failure experience exists, the possibility of the investment enlarges. Second, if the initial wealth is so small and the individual must borrow the money to invest in the second period, the possibility of the investment with the effect of failure experience becomes small. Third, the high profitability of the investment, small interest rate, and large initial wealth are the conditions to enlarge the possibility of investment with the effect of failure experience.

According to the textbooks on risk management, the tools of risk management can be classified into two types, `ex-ante' and `ex-post' risk management. The former, which is called as `loss control', is affected before an accident occurs. Installing fire alarms and building earthquake-proof houses are the good examples of loss control. In contrast, the latter, which is called as `loss (risk) financing', is affected after an accident occurs. Saving money and purchasing the insurance are good examples of loss (risk) financing.

Loss (risk) financing is the essential tool in case of engaging in some risky activities, but the purpose of that type of risk management is to cover the damages. Thus, the academic fields in loss (risk) financing have a tendency to not include investigating the effect of accident experience.

However, in most cases, the persons concerned may be able to get intangible assets such as skills and knowledge so as to not to relapse the accidents from the past accident experience. In this situation, the persons may choose to commit the risk activities even if the expected profit in the short run is negative.

For example, consider the person who wants to become a Certified Public Accountant (CPA). In many countries including Japan, it is necessary to pass the exam to become a CPA. However, the CPA exam is very difficult. According to the website of the Financial Services Agency in Japan, the acceptance rate of the CPA exam in 2008 was 17.1%. From this acceptance rate, only a small number of people passed the exam at the first chance. In other words, most people failed the exam and had to try again.

Risk And Insurance Journal, Economic Analysis, Failure Experience, Certified Public Accountant, CPA, Risk Management, Exogenous, Financial Services, Interest Rate, Earthquake-Proof Houses, Loss Financing, Investment Change, Residual Wealth, Consumer Switching, Asymmetric Firms.