Abstract
In developing world, the risk behavior of farmers is very crucial as their daily risk and uncertainty decisions affect their livelihood and overall well-being in the long run. Recent studies related to risky choices among poor farmers found varied results in various countries. The present study investigated farmers’ risk behavior in one of the leading states in agricultural growth in recent time, the Indian state of Madhya Pradesh. This study used Holt–Laury experimental method to assess the determinants of risk for farmers with limited literacy and capabilities. It also compared two methods—expected utility theory and prospect theory and found significant risk aversion and probability distortion. This study also found socioeconomic characteristics are more important in determining risk curvature and probability weighting than income hypothesis and follows an S-shaped curve, which is inconsistent with the proposition of Tversky and Kahneman (Econometrica 47(2):263–291, 1979 10.2307/1914185) and (J Risk Uncertain, 5:297–323, 1992).
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Notes
Allais (1953), in his seminal study, empirically proved that individuals do not necessarily behave according to the expected utility maximization behavior. Later, psychologists and economists also supported this view provided various evidence in deviation of expected utility. Such experimental evidence against the EU model accumulated and evolved in the form of a behavioral theory proposed to explain it and prevail as an alternative model.
Due to no education of the majority respondents (62.81%), researcher has helped to filled all the details of the questionnaire with their consent.
Probability weighting function explains why the same person prefers to buy an insurance (risk averse behavior) and at the same time he also prefers to buy a lottery (risk seeking behavior).
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Acknowledgements
We are thankful to the School of Economics, University of Hyderabad. We also thankful to all faculty members, especially my supervisor for their suggestion and comments. We are also thankful to the head of the village people who participated in the experiment where data are collected.
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Appendices
Appendix 1A
Detail procedure of the survey and experiments
Thank you all for participating in this survey and experiment. This is a study about farmers’ role in risk behavior and repercussions of farmers’ well-being due to their decision making. We are here to collect information about risk attitudes and some personal and farm-related information. Therefore, this process consists of two parts: you will be asked about personal information and farm-related activities in the first part. In the second part, you will join the experiments of two different known probability situations. Experimental procedures are given below, and you have a chance to win the prize in the game based on partly your choice and partly your luck. The amount will be paid after the completion of the experiment. The payment will be the fraction of the total winning amount of experiment. The fraction is already decided and written separately in the envelope. It will disclose after the end of experiment. If you want to leave the experiment at any point in time, you can leave it. The experimental method will be explained below, with a live example, so it is important that you listen carefully as possible. For the final experiment, you will be asked to come to another room individually. The information you will share with us will be confidential and will not be shared with anyone. This information will be used only for academic purposes.
If you have any query or cannot understand the process, please feel free to ask at any time. The questionnaire, as well as the experimental choice options, will be given to the respondents. To complete the questionnaire and experiment will take around 30 min.
Part 1
(Questionnaire for Socioeconomic Characteristics)
Farmers’ Characteristics
1. Name ______ 2. Age __________.
3. Gender __________, 4. Household Size __________.
5. Education Level No __________, 1 to 12th _________, Graduation _______________.
6. Number of people directly involved in Agriculture __________.
7. Number of school/college going children in household __________.
8. Annual expenditure on education __________.
9. Total expected family income __________.
10. No. of years involved in farm activities __________.
11. Do you include family member in the process of agricultural decision, if yes, 1/_____________.
Farm Characteristics
12. Total expected farm income __________.
13. Do you have debt from informal sources? if Yes, 1 __________ Amount _________.
14. Do you have debt for formal sources? if Yes, 1 ____________ Amount ___________.
Process of experiment
Your objective in these activities is to win a money prize. To win the prize, you have to make a choice between two options: high-risk and low-risk prospects, and the winning and losing amount is determined by a random draw. Given the choice experiment in row (Table 6), option lottery A consists of the amounts with known probabilities, i.e., only 10 percent chance of getting payoff rupees 250, and 90 percent chance of getting payoff rupees 100. Similarly, to counter against option A, lottery B consists of a 10 percent chance of getting payoff rupees 400 and 90 percent chance of getting 10. The respective probabilities are mentioned in the form of black and red balls. Your goal is to make a choice in each row between lottery A and lottery B in the experiment. You can switch lottery between A and B only once in the experiment.
For example, given in Table 7 a series of 10 rows, you have to choose lottery A or lottery B in all ten rows. Once you choose your plans, the prize you will receive in each row will depend on the number that you draw from ten cards; as I am showing each card has its own number from 1 to 10.
Now you can see an example, how a lottery prize can be earned. For example, suppose you have chosen lottery A in row 2. Then, you draw a single card among 10 cards which consist of 2 black and 8 red. If the card is black, you will earn 180, and if it is red, you will earn 140.
Similarly, if you choose lottery A in row 4, single draw among the 10 cards will be conducted. But, the number of black cards in given ten cards will be 4. It means that the chances of getting the black card is higher than row 2. Similarly, if you choose lottery B, similarly, if you look at row 5, all black and white cards are equal. It means that chances of getting black and white cards are equal.
Similarly, in row seven, the chances of getting the maximum amount are higher because the number of black balls is 7 out of the ten balls.
Finally, in the last row, row 10, all balls are black regardless of the payoffs associated with each lottery choice, either lottery A or lottery B.
Remember, the payment will be made only once, which will be randomly drawn from the available rows through cards 1 to 10 as presented above. Therefore, once you have made all the choices, you will choose a particular row for payment, and the game will be played according to a particular row given black and white balls.
Appendix 1B
Codes for the estimation
Model 1
Model 2
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Kushawaha, R., Sharma, N.K. Risk behavior among farmers: examining expected utility and prospect theory approach. J. Soc. Econ. Dev. (2024). https://doi.org/10.1007/s40847-023-00305-5
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DOI: https://doi.org/10.1007/s40847-023-00305-5