Anomaly in decision making under risk: Violation of stochastic dominance among farmers in Gujarat, India

Abstract

We investigate farmers’ decision making under risk by eliciting their willingness to pay for hypothetical risky income distributions. We also investigate whether farmers behave differently to price and yield risk. To do so, we present the risky income distributions as those with constant price and variable yield to a set of farmers, and those with constant yield and variable price to another set of farmers. We find that many farmers violate first order stochastic dominance, an assumption central to validity of rational decision making under risk. We also find that farmers who perceive themselves as risk takers are more likely to violate them.