Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Abstract

We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.

Structural estimation of farmers’ risk and ambiguity preferences: a field experiment

“…Second, we followed a protocol similar to those used in other experimental papers. Several scaling factors that have already been used in the literature are 2% in Bocquého et al (2014), 10% in Abdellaoui et al (2008) and 1/600 in Galarza (2009). Scaling the displayed earning amounts, however, does make it difficult to know with certainty whether subjects made their decisions based on the high amounts that were displayed or the lower amounts that were actually to be paid at the end of the experiment.…”

“…The 3-parameter value function in Equation (1) differs from the models usually estimated in the literature. Indeed, most studies involving a structural estimation of risk parameters (Bocquého et al, 2014;Tanaka et al, 2010) assume that α + = α − . In order to facilitate a comparison of our results with the existing literature, we make the same assumption that α = α + = α − , as well as the assumption that ρ = ρ + = ρ − (see Section 4.1).…”

“…Few articles in this literature elicit preferences among farmer samples and those that do are mainly carried out in the context of developing countries (Binswanger, 1980;Humphrey and Verschoor, 2004;Harrison et al, 2010;Liu, 2013). Moreover, while risk preferences have been elicited in the literature to date (Bocquého et al, 2014;Hellerstein et al, 2013;Reynaud and Couture, 2012), very few papers elicit farmer preferences for ambiguity, perhaps because separately identifying preferences for risk and ambiguity is a challenging task. We aim to fill this gap by using recent advances in experimental economics to structurally elicit farmers' risk and ambiguity preferences.…”

How to Reveal People's Preferences: Comparing Time Consistency and Predictive Power of Multiple Price List Risk Elicitation Methods

“…In addition, recent studies (Tanaka et al 2010;Bocqueho et al 2014) document potential empirical support for prospect theory (PT, Kahneman and Tversky (1979)) 3 when it comes to risk attitudes: Harrison et al (2010) found that PT describes behavior of half of their sample best. There is also evidence that subjective probability weighting (PW) (Quiggin 1982) should be taken into account.…”

Farmers’ willingness to invest in livestock disease control: the case of voluntary vaccination against bluetongue

“…Much of the scientific debate in agricultural decision (or risk) analysis has been on the assessment of the risk attitude (or preferences), which is reflected by the shape of the utility function. Nowadays, the proposed s-shaped utility function from cumulative prospect theory is also tested (Bocquého et al, 2013;Franken et al, 2014). Less attention is given to how farmers make judgments about probabilities and consequences of uncertain events (Lybbert and Just, 2007;Hardaker and Lien, 2010;Just et al, 2010).…”