IDEAS home Printed from https://ideas.repec.org/a/kap/theord/v92y2022i1d10.1007_s11238-020-09796-8.html
   My bibliography  Save this article

Probability weighting for losses and for gains among smallholder farmers in Uganda

Author

Listed:
  • Arjan Verschoor

    (University of East Anglia)

  • Ben D’Exelle

    (University of East Anglia)

Abstract

Probability weighting is a marked feature of decision-making under risk. For poor people in rural areas of developing countries, how probabilities are evaluated matters for livelihoods decisions, especially the probabilities associated with losses. Previous studies of risky choice among poor people in developing countries seldom consider losses and do not offer a refined tracking of the probability-weighting function (PWF). We investigate probability weighting among smallholder farmers in Uganda, separately for losses and for gains, using a method (common consequence ladders) that allows refined tracking of the PWF for a population with low levels of literacy. For losses, we find marked probability weighting near zero, which is in line with evidence found in Western labs. For gains, the absence of probability weighting is remarkable, particularly its absence near 100%. We also find marked differences in probability weighting for traditional farmers which are in line with the observed livelihoods strategies in the study area.

Suggested Citation

  • Arjan Verschoor & Ben D’Exelle, 2022. "Probability weighting for losses and for gains among smallholder farmers in Uganda," Theory and Decision, Springer, vol. 92(1), pages 223-258, February.
    • Handle: RePEc:kap:theord:v:92:y:2022:i:1:d:10.1007_s11238-020-09796-8
    DOI: 10.1007/s11238-020-09796-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11238-020-09796-8
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11238-020-09796-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    3. 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.
    4. Wu, George & Gonzalez, Richard, 1998. "Common Consequence Conditions in Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 16(1), pages 115-139, April.
    5. Takahashi, Taiki, 2011. "Psychophysics of the probability weighting function," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(5), pages 902-905.
    6. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
    7. Helga Fehr-Duda & Thomas Epper, 2012. "Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 567-593, July.
    8. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    9. GlennW. Harrison & StevenJ. Humphrey & Arjan Verschoor, 2010. "Choice under Uncertainty: Evidence from Ethiopia, India and Uganda," Economic Journal, Royal Economic Society, vol. 120(543), pages 80-104, March.
    10. Mohammed Abdellaoui & Ahmed Driouchi & Olivier L’Haridon, 2011. "Risk aversion elicitation: reconciling tractability and bias minimization," Theory and Decision, Springer, vol. 71(1), pages 63-80, July.
    11. Pavlo R. Blavatskyy, "undated". "Axiomatization of a Preference for Most Probable Winner," IEW - Working Papers 230, Institute for Empirical Research in Economics - University of Zurich.
    12. Gijs van de Kuilen & Peter P. Wakker, 2011. "The Midweight Method to Measure Attitudes Toward Risk and Ambiguity," Management Science, INFORMS, vol. 57(3), pages 582-598, March.
    13. Quang Nguyen & Colin Camerer & Tomomi Tanaka, 2010. "Risk and Time Preferences Linking Experimental and Household Data from Vietnam," Post-Print halshs-00547090, HAL.
    14. Mohammed Abdellaoui & Frank Vossmann & Martin Weber, 2005. "Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty," Management Science, INFORMS, vol. 51(9), pages 1384-1399, September.
    15. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    16. Nathalie Etchart-Vincent & Olivier l’Haridon, 2011. "Monetary incentives in the loss domain and behavior toward risk: An experimental comparison of three reward schemes including real losses," Journal of Risk and Uncertainty, Springer, vol. 42(1), pages 61-83, February.
    17. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
    18. Uri Gneezy & Jan Potters, 1997. "An Experiment on Risk Taking and Evaluation Periods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 631-645.
    19. Verschoor, Arjan & D’Exelle, Ben & Perez-Viana, Borja, 2016. "Lab and life: Does risky choice behaviour observed in experiments reflect that in the real world?," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 134-148.
    20. Chetan Dave & Catherine Eckel & Cathleen Johnson & Christian Rojas, 2010. "Eliciting risk preferences: When is simple better?," Journal of Risk and Uncertainty, Springer, vol. 41(3), pages 219-243, December.
    21. Marcel Fafchamps, 2003. "Rural Poverty, Risk and Development," Books, Edward Elgar Publishing, number 3127.
    22. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98, World Scientific Publishing Co. Pte. Ltd..
    23. Elaine M. Liu, 2013. "Time to Change What to Sow: Risk Preferences and Technology Adoption Decisions of Cotton Farmers in China," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1386-1403, October.
    24. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    25. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
    26. 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 557-571, March.
    27. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
    28. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, May.
    29. Ferdinand M. Vieider & Peter Martinsson & Pham Khanh Nam & Nghi Truong, 2019. "Risk preferences and development revisited," Theory and Decision, Springer, vol. 86(1), pages 1-21, February.
    30. Ferdinand M. Vieider & Abebe Beyene & Randall Bluffstone & Sahan Dissanayake & Zenebe Gebreegziabher & Peter Martinsson & Alemu Mekonnen, 2018. "Measuring Risk Preferences in Rural Ethiopia," Economic Development and Cultural Change, University of Chicago Press, vol. 66(3), pages 417-446.
    31. Neilson, William S & Stowe, Jill, 2002. "A Further Examination of Cumulative Prospect Theory Parameterizations," Journal of Risk and Uncertainty, Springer, vol. 24(1), pages 31-46, January.
    32. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
    33. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    34. Steven J. Humphrey & Arjan Verschoor, 2004. "Decision-making Under Risk among Small Farmers in East Uganda," Journal of African Economies, Centre for the Study of African Economies, vol. 13(1), pages 44-101, March.
    35. Pavlo Blavatskyy, 2006. "Axiomatization of a Preference for Most Probable Winner," Theory and Decision, Springer, vol. 60(1), pages 17-33, February.
    36. Humphrey, Steven J. & Verschoor, Arjan, 2004. "The probability weighting function: experimental evidence from Uganda, India and Ethiopia," Economics Letters, Elsevier, vol. 84(3), pages 419-425, September.
    37. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kpegli, Yao Thibaut & Corgnet, Brice & Zylbersztejn, Adam, 2023. "All at once! A comprehensive and tractable semi-parametric method to elicit prospect theory components," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    2. Golo-Friedrich Bauermeister & Daniel Hermann & Oliver Musshoff, 2018. "Consistency of determined risk attitudes and probability weightings across different elicitation methods," Theory and Decision, Springer, vol. 84(4), pages 627-644, June.
    3. Matthew D. Rablen, 2023. "Loss Aversion, Risk Aversion, and the Shape of the Probability Weighting Function," Working Papers 2023013, The University of Sheffield, Department of Economics.
    4. Katarzyna M. Werner & Horst Zank, 2019. "A revealed reference point for prospect theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 731-773, June.
    5. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    6. Stephen G Dimmock & Roy Kouwenberg & Olivia S Mitchell & Kim Peijnenburg, 2021. "Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field," Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4524-4563.
    7. Nathalie Etchart-Vincent, 2009. "Probability weighting and the ‘level’ and ‘spacing’ of outcomes: An experimental study over losses," Journal of Risk and Uncertainty, Springer, vol. 39(1), pages 45-63, August.
    8. Jinrui Pan & Craig S. Webb & Horst Zank, 2019. "Delayed probabilistic risk attitude: a parametric approach," Theory and Decision, Springer, vol. 87(2), pages 201-232, September.
    9. Vieider, Ferdinand M. & Truong, Nghi & Martinsson, Peter & Pham Khanh Nam & Martinsson, Peter, 2013. "Risk preferences and development revisited: A field experiment in Vietnam," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2013-403, WZB Berlin Social Science Center.
    10. Thomas Epper & Helga Fehr-Duda, 2012. "The missing link: unifying risk taking and time discounting," ECON - Working Papers 096, Department of Economics - University of Zurich, revised Oct 2018.
    11. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    12. Rablen, Matthew D., 2019. "Foundations of the Rank-Dependent Probability Weighting Function," IZA Discussion Papers 12701, Institute of Labor Economics (IZA).
    13. Diecidue, Enrico & Schmidt, Ulrich & Zank, Horst, 2009. "Parametric weighting functions," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1102-1118, May.
    14. Ferdinand M. Vieider & Peter Martinsson & Pham Khanh Nam & Nghi Truong, 2019. "Risk preferences and development revisited," Theory and Decision, Springer, vol. 86(1), pages 1-21, February.
    15. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
    16. Laurent Denant-Boemont & Olivier L’Haridon, 2013. "La rationalité à l'épreuve de l'économie comportementale," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 35-89.
    17. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    18. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
    19. Yao Thibaut Kpegli, 2023. "Smoothing Spline Method for Measuring Prospect Theory Components," Working Papers 2303, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    20. George Wu & Alex B. Markle, 2008. "An Empirical Test of Gain-Loss Separability in Prospect Theory," Management Science, INFORMS, vol. 54(7), pages 1322-1335, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:theord:v:92:y:2022:i:1:d:10.1007_s11238-020-09796-8. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.