Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Abstract

We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.

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Reference

Géraldine Bocquého, Florence Jacquet, and Arnaud Reynaud, “Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data”, European Review of Agricultural Economics, vol. 41, n. 1, 2014, pp. 135–172.