Decision-making Under Risk among Small Farmers in East Uganda

Abstract

We report an experimental test of individual decision-making behaviour under risk conducted in rural east Uganda. The test employs an incentive compatible design where subjects were paid according to the outcome of one of their choices. We find that the risk preferences of east Ugandan farmers exhibit systematic and predictable deviations from expected utility maximisation. These include violations of the independence and transitivity axioms of expected utility theory, and reference-dependent preferences. Not all deviations are the same as those which emerge from tests using (generally) student subjects at First World universities (e.g., we observe an S-shaped rather than an inverse S-shaped probability weighting function). We also find evidence of a substantial stochastic component to behaviour. The implications of our findings in terms of the appropriate characterisation of risk preferences in applied policy analyses are discussed.