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Expected Utility or Prospect Theory Maximizers? Results from a Structural Model based on Field-experiment Data

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  • Bocqueho, Geraldine
  • Jacquet, Florence
  • Reynaud, Arnaud

Abstract

We 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 Info

Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114257.

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Date of creation: 2011
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Handle: RePEc:ags:eaae11:114257

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Related research

Keywords: risk preferences; field experiment; experimental economics; prospect theory; Risk and Uncertainty; C91; D81; J16; Q12;

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References

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  1. Arnaud Reynaud & Stephane Couture, 2010. "Stability of Risk Preference Measures: Results From a Field Experiment on French Farmers," LERNA Working Papers 10.10.316, LERNA, University of Toulouse.
  2. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  3. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-71, March.
  4. Glenn Harrison & John List, 2004. "Field experiments," Artefactual Field Experiments 00058, The Field Experiments Website.
  5. Galarza, Francisco, 2009. "Choices under Risk in Rural Peru," MPRA Paper 17708, University Library of Munich, Germany.
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  7. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  8. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
  9. Nguyen, Quang, 2009. "Do fishermen have different preferences?: Insights from an experimental study and household data," MPRA Paper 16012, University Library of Munich, Germany.
  10. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September.
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Cited by:
  1. Douadia Bougherara & Xavier Gassmann & Laurent Piet, 2011. "A structural estimation of French farmers’ risk preferences: an artefactual field experiment," Working Papers SMART - LERECO 11-06, INRA UMR SMART.

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