Lab and life: Does risky choice behaviour observed in experiments reflect that in the real world?

Abstract

Risk preferences play a crucial role in a great variety of economic decisions. Measuring risk preferences reliably is therefore an important challenge. In this paper we ask the question whether risk preferences observed in economic experiments reflect real-life risky choice behaviour. We investigate in a sample representative for a rural region of eastern Uganda whether pursuing farming strategies with both a higher expected profit and greater variance of profits is associated with willingness to take risks in an experiment. Controlling for other determinants of risk-taking in agriculture, we find that risky choice behaviour in the experiment is correlated with risky choice behaviour in real life in one domain, i.e. the purchase of fertiliser, but not in other domains, i.e. the growing of cash crops and market-orientation more broadly. Our findings suggest that economic experiments may be good at capturing real-world risky choice behaviour that is narrowly bracketed

Individual preferences and farm-level decisions : experimental evidence from Costa Rica

“…This result is similar to Charness and Viceisza (2016) and Vieider et al (2016Vieider et al ( , 2014, who find farmers are willing to take risks in Senegal, Vietnam, and Ethiopia, respectively. On the other hand, results differ from Verschoor et al (2016), who find higher levels of risk aversion hypothetically and in their risk experiment. Overall, our study shows supporting evidence that farmers in developing countries are not necessarily more risk-averse than subjects from developed countries; on the contrary, people from rural areas seem to tolerate higher risk levels in their daily activities.…”

“…We know that, in theory, risk aversion can affect fertilizer investment in different ways and depends on crop characteristics. Previous studies typically find the contrary: that risk aversion is associated with less fertilizer purchase (Khor et al 2015;Roosen and Hennessy 2003;Verschoor et al 2016), as fertilizer can increase not only output but also its variability (Vablauwe et al 2016). Our findings are consistent with studies showing that applying fertilizer reduces the risk of pests and low yields (Avelino et al 2015) and can be perceived as a risk-reducing strategy.…”

“…However, we cannot confirm the same for the context-free survey estimate. Previous studies using context-free estimates found risk aversion is associated with less implementation of agricultural practices that required more farm investment (Brick and Visser 2015;Holden and Quiggin 2017;Verschoor et al 2016).…”

Contextual Framing and Monetary Incentives in Field Experiments on Risk Preferences: Evidence from German Farmers

“…Apart from the purchase of insurance, other on-farm risk management strategies could receive more attention in future work. For instance, the purchase of fertiliser may be relevant in some developing country contexts, especially in Sub-Saharan Africa (Verschoor et al, 2016).…”

“…Risk and uncertainty play an important role in farm management, and several studies have investigated farmers' risk preferences with an interest in the methodology of experimental economics and external validity (Binswanger, 1980;Alevy et al, 2010;Hill and Viceisza, 2012;Reynaud and Couture, 2012;Hellerstein et al, 2013;Maart-Noelck and Musshoff, 2014;Ihli et al, 2016;Menapace et al, 2016;Verschoor et al, 2016;Rommel et al, 2017;Meraner et al, 2018). For instance, Hellerstein et al (2013) correlated a framed version of a lottery task with farm management decisions of 68 US farmers, and did not find that real-world decision-making such as the purchase of insurance could be predicted by the number of riskier choices in the lottery.…”