Advanced Search
MyIDEAS: Login to save this paper or follow this series

Risk Preferences Under Extreme Poverty: A Field Experiment

Contents:

Author Info

  • Gustavo Adolfo Caballero Orozco

    ()

Abstract

Until now, the dominant belief concerning the relationship between poverty and risk aversion is that the poor are more risk averse. If the poor are more risk averse, then they will choose "low risk–low return" activities that trap them in poverty. However, both empirical and experimental evidence show no clear pattern such as would suggest that the poor are somehowmore averse to risk than others; at times, they even seem to embrace risk, while at other times, there seems to be no difference. Focus has tended to be on extreme behaviors, as these are related to sub-optimal decisions such as have even raised questions whether an individual can be simultaneously both poor and rational. Amongst all the available empirical evidence, there is one bit of evidence of special interest—changes in behavior whenever subsistence is at risk. This paper emerges from the fact that recent experimental evidence in both psychology and economics suggests that certain decisions made under risk respond to reference points.We develop a theory within the traditional streamof rational choices, whereby the references are set by only observable variables, such as prices and family size. According to this theory, extremely poor individuals respond to the income reference that guarantees the consumption of the necessary calories so as to ensure a healthy and longer life. Being in the neighborhood of this reference can incentivize both the seeking of high risk, whenever below the reference, and an aversion to high risk, when above. An experimental exercise was conducted involving 92 individuals from households living in poverty and extreme poverty wherein they participated in a baseline risk experiment that was the one we analyzed. Inasmuch as the treatment was not randomly assigned, but instead was determined based on households’ per-capita incomes, a quasi-experimental approach was used to analyze the results. We use a regression discontinuity design, andfind evidence suggesting that being presented with the opportunity of avoiding undernourishmentsignificantly decreases a household’s risk aversion.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://economia.uniandes.edu.co/publicaciones/dcede2010-33.pdf
Download Restriction: no

Bibliographic Info

Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 007717.

as in new window
Length: 36
Date of creation: 15 Nov 2010
Date of revision:
Handle: RePEc:col:000089:007717

Contact details of provider:

Related research

Keywords: Risk Aversion; Poverty; Regression Discontinuity Design; Undernourishment.;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Hernando Zuleta, 2006. "Poor people and risky business," DOCUMENTOS DE TRABAJO 003356, UNIVERSIDAD DEL ROSARIO.
  2. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  3. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  4. Jeffery Carpenter & Juan Camilo Cardenas, 2006. "Behavioural Development Economics: Lessons from field labs in the developing world," Middlebury College Working Paper Series 0616, Middlebury College, Department of Economics.
  5. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
  6. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
  7. Abhijit V. Banerjee & Esther Duflo, 2007. "Aging and Death under a Dollar a Day," NBER Working Papers 13683, National Bureau of Economic Research, Inc.
  8. Austin Nichols, 2007. "RD: Stata module for regression discontinuity estimation," Statistical Software Components S456888, Boston College Department of Economics, revised 14 Jun 2014.
  9. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
  10. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  11. Abigail Barr & Garance Genicot, 2008. "Risk Sharing, Commitment, and Information: An Experimental Analysis," Journal of the European Economic Association, MIT Press, vol. 6(6), pages 1151-1185, December.
  12. 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.
  13. Masson, Robert T, 1974. "Utility Functions with Jump Discontinuities: Some Evidence and Implications from Peasant Agriculture," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 559-66, December.
  14. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
  15. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  16. Elijah, Obayelu Abiodun & Uffort, Larry, 2007. "Comparative Analysis of the Relationship Between Poverty and Underground economy in the Highly developed, Transition and Developing Countries," MPRA Paper 2054, University Library of Munich, Germany.
  17. Banerjee, Abhijit & Duflo, Esther, 2006. "The Economic Lives of the Poor," CEPR Discussion Papers 5968, C.E.P.R. Discussion Papers.
  18. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  19. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ginger Turner & Farah Said & Uzma Afzal, 2014. "Microinsurance Demand After a Rare Flood Event: Evidence From a Field Experiment in Pakistan," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 39(2), pages 201-223, April.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:col:000089:007717. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Universidad De Los Andes-Cede).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.