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Rational Mean-Variance Decisions for Subsistence Farmers

Author

Listed:
  • Bernard V. Tew

    (Weiss, Peck & Greer, 20 North Wacker Drive, Chicago, Illinois 60606)

  • Donald W. Reid

    (Weiss, Peck & Greer, 20 North Wacker Drive, Chicago, Illinois 60606)

  • Giles T. Rafsnider

    (Department of Agricultural Economics, University of Nebraska at Lincoln)

Abstract

This paper explores the issue of approximating expected utility in applying portfolio theory. It has been demonstrated that expected utility is very closely approximated by an appropriate quadratic function. Recent studies have again questioned the empirical validity of mean-variance analysis. These efforts disregard the importance of the differences among various approximations, and historically, have focused on domestic financial securities. We re-examine the problem in the context of determining risk-efficient portfolios of production activities for subsistence farmers. The risks faced by these farmers are large and probably actuarially nonneutral. Thus, recommendations based on an inappropriate quadratic approximation could result in substantial losses in welfare.

Suggested Citation

  • Bernard V. Tew & Donald W. Reid & Giles T. Rafsnider, 1992. "Rational Mean-Variance Decisions for Subsistence Farmers," Management Science, INFORMS, vol. 38(6), pages 840-845, June.
    • Handle: RePEc:inm:ormnsc:v:38:y:1992:i:6:p:840-845
    DOI: 10.1287/mnsc.38.6.840
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    Citations

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    Cited by:

    1. Andrés Weintraub & Carlos Romero, 2006. "Operations Research Models and the Management of Agricultural and Forestry Resources: A Review and Comparison," Interfaces, INFORMS, vol. 36(5), pages 446-457, October.
    2. Steven C. Blank & Jeffrey McDonald, 1996. "Preferences for crop insurance when farmers are diversified," Agribusiness, John Wiley & Sons, Ltd., vol. 12(6), pages 583-592.
    3. Steven C. Blank, 1995. "The new risk environment in California agriculture," Agribusiness, John Wiley & Sons, Ltd., vol. 11(2), pages 155-168.
    4. Duncan MacEwan & Richard Howitt & Josué Medellín-Azuara, 2016. "Combining Physical and Behavioral Response to Salinity," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-25, March.
    5. MacEwan, Duncan & Howitt, Richard E., 2012. "Behavioral Salinity Response: Estimating Salinity Policies from Remote Sensed Micro-Data," 2012 Conference (56th), February 7-10, 2012, Fremantle, Australia 124331, Australian Agricultural and Resource Economics Society.
    6. Witt, Rudolf & Waibel, Hermann, 2011. "Constraints to diversification of poor fishery-dependent households in Cameroon," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 6(2), pages 1-21, September.

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