Introduction to the Special Issue on Risk Behaviour of Market Participants

Abstract

Risk has been examined for a long time in the field of agricultural economics. Almost all individual and collective decisions are made in an uncertain environment. To understand how market participants respond to risk, economists and psychologists have developed the concepts of risk perception and risk attitude. Risk perception reflects the decision-maker’s interpretation of the likelihood of exposure to the content of the risk and is defined as a decision-maker’s assessment of the risk inherent in a particular situation. On the other hand, risk attitude reflects the extent to which the decision-maker general or consistently dislikes or likes the risk content. It is important to emphasise that risk attitude and risk perception are two distinct concepts. If one could quantify a decision maker’s risk attitude and risk perception, one could predict his risk behaviour. How decision makers will respond to risk also depends on the risk content. Participants in the marketing channel interact, and this interaction, which may take the form of various contract relationships, can influence the risk content they face and may also influence their risk attitude and risk perception. How can we manage risk? At the farm level, various risk management instruments have been developed. Commodity futures and options and crop insurance programmes have been heavily researched in the literature regarding their performance in reducing risk and their use by farmers and agribusiness companies. The first paper in this Special Issue, by Garcia and Leuthold, reviews the various aspects of futures and options that have been studied, and makes various suggestions for future research. Garcia and Leuthold consider that one of the topics that needs to be addressed is how the measurement of risk attitude influences our understanding of risk behaviour. Nelson and Escalante address this issue by deriving a constant relative risk aversion (CRRA) location-scale function for modelling choice under uncertainty. They argue that a mean-variance objective function exhibiting well accepted behavioural assumptions (e.g., decreasing absolute risk aversion) can contribute to a fuller exploration of the location-scale approach in agricultural risk management. Numerous factors have been identified that influence trading behaviour in futures and options markets. Tuthill and Frechette investigate under which conditions a risk-averse hedger may be inclined to adopt speculative behaviour in unbiased markets. While this behaviour is not rational under the standard expected