Lexicographic Ordering and Loss Aversion among Low-Income Farmers

Abstract

As Richard Day explained, expected utility theory suffers from procedural irrationality. This and other problems are illustrated here in the context of decision-making among low-income farmers. Farmers in developing countries are commonly thought to underinvest in modern techniques because their low incomes make them especially risk averse. In addition to the procedural leap of faith, highly restrictive assumptions are needed to apply expected utility theory to the problem. Nor does expected utility theory, as usually prescribed, fit the narrative of loss aversion. The reader is introduced to a procedurally rational substitute called lexicographic safety first. The model is illustrated for the case of rice fertilization in the Philippines, and policy implications are drawn. To illustrate the potential appeal of lexicographic ordering for other applications involving thresholds, a lexicographic model of rational addiction is also provided.