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Choice Under Uncertainty in Developing Countries

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Author Info
Glenn W. Harrison
Steven J. Humphrey
Abstract

We review experimental evidence collected from risky choice experiments using poor subjects in Ethiopia, India and Uganda. Using these data we estimate that just over 50% of our sample behaves in accordance with expected utility theory and that the rest subjectively weight probability according to prospect theory. Our results show that inferences about risk aversion are robust to whichever model we adopt when we estimate each model separately. However, when we allow both models to explain portions of the data simultaneously, we infer risk aversion for subjects behaving according to expected utility theory and risk seeking behavior for subjects behaving according to prospect theory. We conclude that the current practice of designing policies under the assumption that one or other explains all behavior is fundamentally flawed.

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Paper provided by The Field Experiments Website in its series Artefactual Field Experiments with number 0055.

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Length: 32 pages
Date of creation: 2005
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Handle: RePEc:feb:artefa:0055

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Related research
Keywords: choice under uncertainty; field experiments; developing countries;

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Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments

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  1. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December. [Downloadable!] (restricted)
  2. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley. [Downloadable!]
  3. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December. [Downloadable!]
  4. Paul Collier & Jan Willem Gunning, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series 1034, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  7. Hans P. Binswanger, 1981. "Attitudes Toward Risk: Theoretical Implications of an Experiment in Rural India," Artefactual Field Experiments 0009, The Field Experiments Website. [Downloadable!]
  8. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  9. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  10. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 1992. "Piecemeal trade reform in partially liberalized economies : an evaluation for Turkey," Policy Research Working Paper Series 951, The World Bank. [Downloadable!]
  11. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," Artefactual Field Experiments 0008, The Field Experiments Website. [Downloadable!]
  12. 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. [Downloadable!] (restricted)
  13. Hey, John D., 1995. "Experimental investigations of errors in decision making under risk," European Economic Review, Elsevier, vol. 39(3-4), pages 633-640, April. [Downloadable!] (restricted)
  14. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter. [Downloadable!] (restricted)
  15. Barr, Abigail & Packard, Truman, 2002. "Revealed preference and self-insurance - Can we learn from the self-employed in Chile?," Policy Research Working Paper Series 2754, The World Bank. [Downloadable!]
  16. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer, vol. 1(2), pages 163-183, September. [Downloadable!] (restricted)
  17. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  18. Binswanger, Hans P, 1981. "Attitudes toward Risk: Theoretical Implications of an Experiment in Rural India," Economic Journal, Royal Economic Society, vol. 91(364), pages 867-90, December. [Downloadable!] (restricted)
  19. Humphrey, Steven J., 2000. "The common consequence effect: testing a unified explanation of recent mixed evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 41(3), pages 239-262, March. [Downloadable!] (restricted)
  20. Camerer, Colin, 1998. "Bounded Rationality in Individual Decision Making," Working Papers 1029, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  21. Starmer, Chris, 1992. "Testing New Theories of Choice under Uncertainty Using the Common Consequence Effect," Review of Economic Studies, Blackwell Publishing, vol. 59(4), pages 813-30, October. [Downloadable!] (restricted)
  22. Harrison, Glenn W. & Rutherford, Thomas F. & Tarr, David G., 2003. "Trade liberalization, poverty and efficient equity," Journal of Development Economics, Elsevier, vol. 71(1), pages 97-128, June. [Downloadable!] (restricted)
  23. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
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