Elicit Risk Preferences Research Articles

Heterogeneity of European farmers’ risk preferences: an individual participant data meta-analysis

Abstract We present a new approach to establish an empirical overview of farmers’ risk preferences and the characteristics associated with these preferences. We rely on an Individual Participant Data Meta-analysis whereby we identify studies eliciting risk preferences through self-assessments and Holt and Laury lotteries, and construct and analyse a unique dataset of 5,157 farmers from 19 studies in 13 European countries. Our results reveal significant heterogeneity in risk preferences across elicitation methods, within and across studies, risk domains and farm and farmer characteristics. European farmers are on average risk-averse when risk preferences are elicited by lotteries, and on average risk-neutral when elicited by self-assessments. Beyond differences in the average risk aversion, there are distributional differences pointing to a limited convergence between elicitation methods and a larger explanatory power of farm and farmer characteristics to determine risk preferences elicited with self-assessments compared to lotteries.

Eliciting risk preferences in an artefactual field experiment via replication and an alternative approach

AbstractThis paper investigates risk preferences using an artefactual field experiment conducted with a non-standard subject pool of farmers in Ghana. I introduce an alternative methodology for studying preferences following replication of a seminal risk elicitation procedure by Binswanger (Am J Agric Econ 62(3):395407, 1980). An important feature of both approaches is that they are easy to understand and, hence, are particularly suitable for eliciting preferences among subjects with low levels of formal education. I successfully replicate Binswanger’s study, documenting how his original result of the moderate level of risk aversion for an average farmer can be generalized to a different country. However, using my alternative approach, whereby lotteries are presented in the loss domain, I find that half of my experimental subjects violated expected utility theory. This approach is of relevance to the current literature on studying risk preferences among subjects with poor literacy skills.

Measures of cognitive ability and choice inconsistency

Cognitive skills affect individual choices. Researchers commonly use Raven's Progressive Matrices (RPM) tests and the Cognitive Reflection Test (CRT) to assess the relationship between cognitive abilities and economic decision making. In this paper, we study the relationship between these measures, and investigate the extent to which they are correlated and whether they are best described as substitutes or complements. Combining a sample of 686 children and a sample of 2,332 adults, we compare individual performances in the RPM test and CRT test. First, we report a significant positive correlation between the two measures of 0.3. Second, we document that performance in both the RPM test and CRT are significant predictors of behavioral inconsistency observed in incentivized time and risk preference elicitation tasks for children and risk preference elicitation task for adults.

Weather risks, crop losses, and risk proneness: An examination of evolving risk preferences of rice farmers in Bangladesh

Changing climate poses significant challenges for smallholder rice farmers. Weather-related deviations from longer-term patterns and crop losses due to abiotic hazards can affect farmer risk preferences and drive adaptive responses. In addition, farmers’ proneness to and past experiences with crop risks such as drought, submergence, and excess soil salinity can impact their baseline risk preferences and their response to changing risks. Using data for Bangladesh from two waves of the Rice Monitoring Survey, climate-related data (precipitation and temperature), farmer reports of crop losses, and measures of proneness to abiotic risks, this article estimates how weather deviations from longer-term trends, crop losses, and proneness to crop risks (submergence, drought, and soil salinity) affect elicited risk preferences over time. This research finds evidence in favor of the hypothesis that larger absolute seasonal deviations from past patterns of seasonal mean daily minimum temperature and seasonal total precipitation yield increased risk aversion. In addition, the research provides mixed evidence with respect to risk proneness and farmers’ change in risk preferences over time. Contrary to our original hypothesis, individuals with land more prone to soil salinity become more risk averse rather than less, but, consistent with our hypothesis, those with land more prone to crop submergence become more risk preferring over time. Because of differences in crop experiences and degrees of proneness to risk, risk preferences for farmers in different regions are predicted to evolve along different pathways. This article contributes to the literature on risk preference formation by considering the possibility that less significant deviations than shocks might also contribute to evolving risk preferences. In addition, the article emphasizes the regional heterogeneity of changing preferences. An ancillary finding of this work suggests that risk preferences are only weakly related over time, contrary to other findings in the literature on the stability of risk preferences. Of policy relevance, the differential experiences in weather variability at the regional and local levels yield important differences in changes in preferences and should give rise to careful, regional-level policies to support adaptation to changing weather.

Eliciting risk preferences: is a single item enough?

Economists and psychologists frequently use single-item measures of risk preferences despite potential limitations in reliability and criterion validity compared to their multi-item counterparts. This can be particularly problematic when individual differences in risk preferences are used to predict real-world economic, health, and financial outcomes. In this paper, we compare a popular single-item measure of risk preference, the General Risk Question (GRQ), to multi-item measures of domain-general and specific risk preference measures. In a two-wave survey study of 434 adults, we found that the GRQ had good psychometric reliability and converged with other multi-item measures of risk preferences. The GRQ also exhibited a similar pattern of associations with other personality and demographic variables as compared to multi-item measures. However, the predictive validity of the GRQ was lower than multi-item measures for most of the outcomes examined. The GRQ also explained less incremental variance for real-world outcomes over the Big Five personality traits than the multi-item counterparts. Although the GRQ is a construct-valid measure of risk preferences, researchers should nonetheless consider the trade-off between survey efficiency and predictive efficacy when deciding whether a single item is enough.

Violations of first-order stochastic dominance

AbstractI find necessary and sufficient conditions for first-order stochastic dominance (FOSD) violations for choices from a budget line of Arrow securities. Applying this characterization to existing data, I compare FOSD violation rates across a broad set of risk preference elicitation tasks.

Repeated experience and consistent risk preferences

Economists have developed various methods to elicit risk preferences, which can help forecast decision-making in risky scenarios. However, risk elicitation can be complex, and there remain unresolved challenges. Our research demonstrates that repeated exposure to risk elicitation tasks, such as the Holt-Laury and Eckel-Grossman tasks, results in individuals making more consistent decisions with less noise. This suggests that measuring risk preferences after individuals have gained experience and learning can yield more consistent outcomes and provide a more accurate representation of individual risk preferences.

Aspirations, risk preferences, and investments in agricultural technologies

We investigate the relationship between aspirations, risk preferences, and investment in agricultural technologies using data collected among cacao farmers in Ecuador. We first find that an inverted U-shaped relationship between the income aspirations gap and investments exists when considering relatively long-term investments (e.g., farm renovations) but not when considering relatively short-term investments (e.g., fertilizer use). Next, using lab-in-the-field experiments and survey instruments designed to elicit risk preferences, we show that the observed inverted U-shaped relationship is robust to the inclusion of risk preference parameters in our regression specification—a potentially important omitted variable in previous studies. Our empirical results are consistent with existing theory suggesting that aspirations that are ahead, but not too far ahead, of current levels provide the best incentives for investments in the future, and suggest the presence of psychological constraints to investments in agricultural technology.

Inconsistent choices over prospect theory lottery games: Evidence from field experiments

Expected utility theory and classroom experiments have been commonly used to test the consistency and/or stability of elicited risk preferences among individuals. Usually conducted in developed countries, these studies have shown that risk preferences are inconsistent or unstable. However, the literature falls short when assessing the consistency of risk preferences under the Prospect Theory (PT) paradigm. This study reports the results of lottery games, played during two consecutive experimental sessions, to test the consistency of PT risk preferences among smallholder farmers in Ecuador, a developing country. I find evidence of consistency in the farmers’ risk preferences at the sample level. Nonetheless, I find inconsistency in risk preferences (risk aversion, probability distortion, and loss-aversion) at the individual level. I assess whether there is heterogeneity in the results across farmers’ demographic and socioeconomic attributes. Evidence suggests that relative consistency in the degree of loss aversion is higher among farmers who are female, own larger farms, and are more educated.

Comparing risk elicitation in lotteries with visual or contextual aids

Eliciting risk preferences usually involves tasks that subjects may find complex, such as calculations of expected values and assessment of probabilities in multiple price lists (MPL). There is a serious concern that the decisions of the subjects may be driven by miscalculations or miscalibration of probabilities, rather than by their risk preferences. In this paper, we test whether introducing aids to the usual lottery choices would help to reduce the error rate and possibly change risk aversion elicitation. The experiment was run with subjects from a rural area in Honduras. We compare the risk elicitation results of a multiple price list and two different treatments, one with visual aids (graphical representation of probabilities) and the other with contextual aids (bills to represent rewards and a distribution of ten beans between the two rewards to represent a lottery). Our results indicate that risk attitudes elicitation was affected with contextual aids, reducing risk aversion. For the treatment with visual aids we observe no effect.

Happy to take some risk: Estimating the effect of induced emotions on risk preferences

How do emotions influence one’s willingness to take on risk? We show that answering this question can be particularly challenging because induced emotions are highly sensitive to a respondent’s contemporaneous experiences and can be rapidly diluted while respondents answer subsequent survey questions. We randomly assign respondents to one of three emotion-inducing videos (positive, negative, and neutral), and we also randomize whether subjects complete a self-assessment survey tool measuring emotions prior to completing risk preference elicitation tasks and immediately after watching the emotion-inducing video. We verify changes in emotions for all respondents by using facial expression analysis software. Respondents who watched a positive video and skipped the emotion-measuring survey were less risk averse, particularly in the first of two preference elicitation tasks. Our findings indicate that estimates of how induced emotions affect risk aversion may be attenuated by including any intermediate tasks, including a survey to measure such emotions. PsychINFO Classification Code: 2360.

The (in)stability of farmer risk preferences

AbstractWe test and quantify the (in)stability of farmer risk preferences, accounting for both the instability across elicitation methods and instability over time. We use repeated measurements (N = 1530) with Swiss fruit and grapevine producers over 3 years, using different risk preference elicitation methods (domain‐specific self‐assessment and incentivised lotteries). We find that farmers' risk preferences change considerably when measured using different methods. For example, self‐reported risk preference and findings from a Holt and Laury lottery correlate only weakly (correlation coefficients range from 0.06 to 0.23). Moreover, we also find that risk preferences vary considerably over time, that is, applying the same elicitation method to the same farmer in a different point in time results in different risk preference estimates. Our results show self‐reported risk preferences are moderately correlated (correlation coefficients range from 0.42 to 0.55) from one year to another. Finally, we find experiencing crop damages due to climate extremes and pests is associated with farmers becoming more risk tolerant over time in specific domains.

On the role of monetary incentives in risk preference elicitation experiments

Incentivized experiments in which individuals receive monetary rewards according to the outcomes of their decisions are regarded as the gold standard for preference elicitation in experimental economics. These task-related real payments are considered necessary to reveal subjects’ “true preferences.” Using a systematic, large-sample approach with three subject pools of private investors, professional investors, and students, we test the effect of task-related monetary incentives on risk preferences in four standard experimental tasks. We find no significant differences in behavior between and within subjects in the incentivized and non-incentivized regimes. We discuss implications for academic research and forions in the field.

Risk Preferences and the Adoption of Subsidised Crop Insurance: Evidence from Lithuania

Crop insurance adoption remains low among small and medium farms – despite financial public support in the form of premium subsidies. A better understanding of smaller farmers’ insurance decisions and contract attribute preferences is thus needed to encourage insurance solutions. Moreover, previous research has primarily examined risk preferences and insurance adoption among Western European farmers, while little is known about insurance markets and risk preferences in Central and Eastern European countries. We contribute to the literature by i) contrasting the current status of insurance adoption by Lithuanian farmers by farm size, ii) assessing farmers’ risk preferences and attitudes towards crop insurance, and iii) investigating small and medium farmers’ preferences for the characteristics of a new (hypothetical) subsidised multiple peril crop insurance (MPCI) product. Therefore, we conduct a socio-economic survey in Lithuania that features a risk preference elicitation task and a discrete choice experiment (DCE). Findings show that, on average, sampled farmers are risk-neutral to slightly risk-seeking and that insurance adoption is lowest among smaller farms (<50 hectares). Moreover, insurance adoption was associated with higher risk exposure, higher trust in insurance services, and higher willingness to take farming-specific risks on all farms. For small and medium farms, the DCE results suggest preference heterogeneity for contract attributes and higher adoption rates when contract design reduces the risks and efforts associated with subsidised insurance.

Eliciting risk preferences that predict risky health behavior: A comparison of two approaches.

Information on attitudes to risk could increase understanding of and explain risky health behaviors. We investigate two approaches to eliciting risk preferences in the health domain, a novel “indirect” lottery elicitation approach with health states as outcomes and a “direct” approach where respondents are asked directly about their willingness to take risks. We compare the ability of the two approaches to predict health‐related risky behaviors in a general adult population. We also investigate a potential framing effect in the indirect lottery elicitation approach. We find that risk preferences elicited using the direct approach can better predict health‐related risky behavior than those elicited using the indirect approach. Moreover, a seemingly innocuous change to the framing of the lottery question results in significantly different risk preference estimates, and conflicting conclusions about the ability of the indicators to predict risky health behaviors.

Varieties of risk preference elicitation

We explore risk preference elicitation when subjects choose directly from an exogenously specified set of lotteries. Our choice tasks differ incrementally, e.g., from choosing between two lotteries to selecting a portfolio from a continuous set of bundled Arrow securities, and from text to spatial presentation. Each subject completes multiple instances of five different tasks, and responses for each task are summarized in parametric (CRRA) and non-parametric (normalized risk premium) measures of risk preference. Variation in task attributes explains much of the observed wide variation in elicited preferences and in correlations across task pairs.

Comparing Risk Elicitation in Lotteries with Visual Or Contextual Framing Aids

Eliciting risk preferences usually involves tasks that subjects may find complex, such as calculations of expected values and assessment of probabilities in multiple price lists (MPL). There is a serious concern that the decisions of the subjects may be driven by miscalculations or miscalibration of probabilities, rather than by their risk preferences. In this paper, we test whether introducing aids to the usual lottery choiceswould help to reduce the error rate and possibly change risk aversion elicitation. The experiment was run with subjectsfrom a rural area in Honduras. We compare the risk elicitation results of a multiple price list and two different treatments, one with visual aids (graphical representation of probabilities) and the other with contextual framing aids (bills to represent rewards and a distribution of ten beans between the two rewards to represent a lottery). Our results indicate that risk attitudes elicitation was affected with contextual framing aids, reducing risk aversion. For the treatment with visual aids we observe no effect.

Elicitation of risk preferences through satisficing

Financial institutions across the globe are now required to measure how much risk their clients are willing to accept. Despite its importance, there is no consensus on how to assess risk attitudes in providing adequate and legally compliant financial services. The standard approaches have been challenged. Recently, financial regulators have begun to focus on the worst possible scenario: Retail investors should be inquired about how much loss they are willing and able to bear. We examine the satisficing method, a recent approach that brings the worst possible scenario to the center of the risk-preference assessment. This method involves asking participants to state the minimum returns they are willing to accept given a portfolio comprising a safe and a risky prospect. The stated minimum returns are a measure of risk preference. We observe that this measure correlates well with existing measures of risk preference, has high test–retest reliability while capturing high response variation, and predicts investments in stock or mutual funds.

Risk Preference Elicitation and Financial Advice Taking

Financial advisors rely on accurate measures of investor risk preferences. This study compares different risk elicitation methods (REMs) in terms of their perceived suitability and impact on financial advice taking. The results suggest that the perceived suitability of the suggested risk profile strongly predicts delegation to an advisory tool. REMs differ in terms of their perceived process similarity with the investor, which positively affects suitability (and thus, delegation) directly and through its positive effect on source credibility. Differences were also found with regards to the perceived complexity of the risk profiling task, which is positively related to suitability. In summary, the findings imply that applying suitable REMs matters not only because it avoids misrepresentation of an investor’s true risk preferences, but because it directly affects the propensity to delegate financial decision-making.

Eliciting Risk Preferences Experimentally versus Using a General Risk Question. Does Financial Literacy Bridge the Gap?

The study investigates the stability of financial risk preference choices elicited from subjects by way of two methods, namely: experimentally elicited incentivized revealed risk preferences (IRRP) and (self-reported) perceived willingness to take a financial risk (PWTFR). The research further examines whether financial literacy (a human capital aspect) helps in reducing the gap between IRRP and PWTFR choices made by subjects. A total of 193 university students (where 53% were female) participated in the study. The subjects completed IRRP choices from four multiple price list (MPL) risk preference tasks and a financial literacy questionnaire. There is a tendency to anchor at extremes of risk-seeking behavior when subjects self-report their PWTFR choices. A paired t-test analysis of the two methods shows that the average responses from the two methods are significantly different. A random effect (RE) panel regression shows that an increase in financial literacy narrows the gap between IRRP and PWTFR choices. The study’s findings show that responses by subjects from a PWTFR general risk question (GRQ) and IRRP experiment are unstable and inconsistent. What people say in a survey does not always translate into what they do when faced with a risk preference choice dilemma. Financial literacy helps individuals to predict their risk attitudes more precisely.