Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data
AbstractWe elicit risk preferences of French farmers in a field experimental setting under expected utility theory and cumulative prospect theory. We use two different estimation methods, namely the interval approach and the estimation of a random preference model. On average, farmers are risk averse and loss averse. They also exhibit an inverse S-shaped probability weighting function, meaning that they tend to overweight small probabilities and underweight high probabilities. We infer from our results that CPT explains farmers’ behaviour better than EUT in the context of our experiment. We also investigate how preferences correlate with individual socio-demographic characteristics. We find that education and agricultural innovation are negatively linked with risk aversion. Our results also show that age, education, household size and the level of secured income tend to lower farmers’ loss aversion. Finally, older farmers and farmers with large farms distort probabilities less than the others. These findings contribute to the literature which compares expected utility with competing decision theories. They also give important insights into farmers’ behaviour towards risk, which is critical for relevant public policy design.
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Bibliographic InfoPaper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114257.
Date of creation: 2011
Date of revision:
risk preferences; field experiment; experimental economics; prospect theory; Risk and Uncertainty; C91; D81; J16; Q12;
Find related papers by JEL classification:
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-15 (All new papers)
- NEP-EVO-2011-10-15 (Evolutionary Economics)
- NEP-EXP-2011-10-15 (Experimental Economics)
- NEP-UPT-2011-10-15 (Utility Models & Prospect Theory)
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