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Is Risk Aversion Really Correlated with Wealth? How Estimated Probabilities Introduce Spurious Correlation

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  • Travis J. Lybbert
  • David R. Just

Abstract

Economists frequently focus on correlations between wealth and risk preferences but rarely observe the probabilities needed to test this relationship empirically. These unobserved probabilities are typically estimated via profit or production functions conditioned on wealth correlates, which may leave statistical fingerprints on subsequently-estimated risk aversion coefficients and confound correlations between wealth and risk preferences. Using data from an experiment with observable probabilities, we compare risk aversion coefficients based on true probabilities with those based on probabilities estimated using standard approaches and show how estimated probabilities can change risk aversion coefficients substantially and introduce spurious correlation between risk aversion and wealth. Copyright 2007, Oxford University Press.

Suggested Citation

  • Travis J. Lybbert & David R. Just, 2007. "Is Risk Aversion Really Correlated with Wealth? How Estimated Probabilities Introduce Spurious Correlation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 964-979.
    • Handle: RePEc:oup:ajagec:v:89:y:2007:i:4:p:964-979
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.01034.x
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    1. Quiroga, Sonia & Iglesias, Ana, 2009. "A comparison of the climate risks of cereal, citrus, grapevine and olive production in Spain," Agricultural Systems, Elsevier, vol. 101(1-2), pages 91-100, June.
    2. Annemie Maertens & A. V. Chari & David R. Just, 2014. "Why Farmers Sometimes Love Risks: Evidence from India," Economic Development and Cultural Change, University of Chicago Press, vol. 62(2), pages 239-274.
    3. Mao, Hui & Zhou, Li & Ifft, Jennifer, "undated". "Risk Preferences, Contracts and Technology Adoption by Broiler Farmers in China," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 257248, Agricultural and Applied Economics Association.
    4. Cardenas, Juan Camilo & Carpenter, Jeffrey, 2013. "Risk attitudes and economic well-being in Latin America," Journal of Development Economics, Elsevier, vol. 103(C), pages 52-61.
    5. Thiagu Ranganathan & Sarthak Gaurav & Ashish Singh, 2014. "Anomaly in Decision Making Under Risk:Violation of Stochastic Dominance Among Farmers in Gujarat, India," IEG Working Papers 343, Institute of Economic Growth.
    6. Bellemare, Marc F., 2009. "The (Im)Possibility of Reverse Share Tenancy," MPRA Paper 23681, University Library of Munich, Germany.
    7. Marc F. Bellemare, 2012. "Insecure Land Rights and Share Tenancy: Evidence from Madagascar," Land Economics, University of Wisconsin Press, vol. 88(1), pages 155-180.
    8. van den Berg, Marrit & Fort, Ricardo & Burger, Kees, 2009. "Natural Hazards And Risk Aversion: Experimental Evidence From Latin America," 2009 Conference, August 16-22, 2009, Beijing, China 51394, International Association of Agricultural Economists.
    9. Luisa Menapace & Gregory Colson & Roberta Raffaelli, 2016. "A comparison of hypothetical risk attitude elicitation instruments for explaining farmer crop insurance purchases," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 43(1), pages 113-135.
    10. Bellemare, Marc F., 2010. "Insecure Land Rights and Share Tenancy in Madagascar," MPRA Paper 23640, University Library of Munich, Germany.
    11. Yu Na Lee, 2021. "Does Aversion to Price Risk Drive Migration? Evidence from Rural Ethiopia," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(4), pages 1268-1293, August.

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