Empirical Challenges for Risk Preferences and Production

Abstract

The importance of risk preferences in agricultural production has long been identified as an important and preeminent issue of policy relevance. Recent developments in the study of production risk have called into question much of the core of risk production research. This article provides an overview of the prominent literature attempting to quantify the impact of risk preferences on production and a discussion of the recently discovered challenges. These challenges are typified by (a) an inability to discern risk preferences, (b) an inability to discern the factors that relate to risk preferences, (c) evidence that prior estimation has severe problems, and (d) a general failure of current models to address the important policy or behavioral issues. Although some of these challenges may appear at first blush to be insurmountable, we suggest a new agenda for risk research in production that directly addresses each of these issues.

Adoption of farm‐based irrigation water‐saving techniques in the Guanzhong Plain, China

“…In addition, production risk has been found to be an important determinant of adoption of agricultural techniques in general (Feder et al., ; Foster and Rosenzweig, ; Liu, ; among others). However, despite the evidence, production risk is frequently ignored in agricultural adoption studies in developing countries like China, because of measurement problems (Just et al., ; Liu and Huang, ).…”

Measuring the effect of risk attitude on marketing behavior

“…Notwithstanding these findings, “simple questions and Likert multi‐item scales are often preferred by applied researchers because of their ease of inclusion in mail surveys and/or their relative low cost …” (Hudson et al., , p. 41) . Recently recognized concerns about empirical implementation of expected utility theory (EUT) add to the uncertainty of how to effectively measure risk preferences and their impact on behavior (e.g., Just, ; Just and Peterson, ; Just et al., ). Clearly, these limitations do not preclude use of EUT, but they do raise questions about its relative ability to predict behavior as well as its use to describe or prescribe behavior.…”

Overcoming Barriers to Integrating Economic Analysis into Risk Assessment†

“…( 8‐11 ) For example, managers are often modeled as maximizing their firm's probability of survival or their own likelihood of promotion. ( 12,13 ) Individuals are modeled as trying to minimize their exposure to certain types of risk. ( 14 ) Decisions are modeled as not only being constrained by available resources, but also by the actions of other decisionmakers or by institutional structures or social norms.…”