Risk behavior among farmers: examining expected utility and prospect theory approach

In developing world, the risk behavior of farmers is very crucial as their daily risk and uncertainty decisions affect their livelihood and overall well-being in the long run. Recent studies related to risky choices among poor farmers found varied results in various countries. The present study investigated farmers’ risk behavior in one of the leading states in agricultural growth in recent time, the Indian state of Madhya Pradesh. This study used Holt–Laury experimental method to assess the determinants of risk for farmers with limited literacy and capabilities. It also compared two methods—expected utility theory and prospect theory and found significant risk aversion and probability distortion. This study also found socioeconomic characteristics are more important in determining risk curvature and probability weighting than income hypothesis and follows an S-shaped curve, which is inconsistent with the proposition of Tversky and Kahneman (Econometrica 47(2):263–291, 1979 10.2307/1914185) and (J Risk Uncertain, 5:297–323, 1992).