Behavioral Preferences Affecting the Adoption of Financial Price Risk Management Tools in Agriculture: A Systematic Literature Review

Price volatility is a significant risk in agriculture, and risk-averse farmers might sacrifice part of their expected profits to mitigate it. Risk management tools such as forward contracts, futures, options, and price insurance, are designed to hedge price risk. Yet adoption rates are low, which contradicts standard expected utility maximizing behavior. We therefore systematically review the literature on the relationship between behavioral factors and farmers’ adoption of price risk management tools to better understand the adoption decision. We here categorize behavioral factors into behavioral preferences, formally integrated into economic choice models, and into psychological factors, which lack mathematical formalization. We use these conceptual model to define search terms and then follow the PRISMA approach to identify 100 relevant papers. Results show that the vast majority of studies incorporate risk aversion in an Expected Utility framework to conceptualize price risk management decisions. Therefore, we conclude that behavioral economic models such as Cumulative Prospect Theory, that incorporates behavioral preferences such as loss aversion and probability distortion, offer promising pathways to better explain farmers’ price risk management decisions. Regarding psychological factors, findings highlight the role of risk attitudes, social environment, and cognitive perceptions in shaping farmers’ decisions. Further research is required to identify behavioral economic preferences that explain price risk management decisions. Moreover, price risk management tools should be adjusted to better consider farmer preferences and thereby become more attractive to farmers.