The Predictive Power of Risk Preference Measures for Farming Decisions

European Review of Agricultural Economics pp. 1–27 doi:10.1093/erae/jbs043

27 Pages Posted: 20 Feb 2016

See all articles by Daniel Hellerstein

Daniel Hellerstein

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS), Resource and Rural Economics Division

Nathaniel Alan Higgins

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

John Horowitz

U.S. Department of Agriculture (USDA)

Date Written: March 19, 2012

Abstract

This paper uses a lottery-choice mechanism to measure farmer preferences over money-denominated risks. We look at the ability of these choice data to predict farming decisions for an in-person sample of 68 farmers. A coarse version of our risk preference measure has substantial explanatory power but in an unexpected direction: a farmer who was more risk averse under our measure was less likely to have diversified his operation and less likely to have a crop insurance contract. A fine version of our risk preference measure has essentially no explanatory power. We conclude that despite their widespread use in the lab, lottery-choice measures of risk preferences are unproven for predicting real world farming behaviour.

Keywords: risk preference, best management practices, farmer risk aversion, Holt–Laury risk measure

JEL Classification: Q12

Suggested Citation

Hellerstein, Daniel and Higgins, Nathaniel Alan and Horowitz, John, The Predictive Power of Risk Preference Measures for Farming Decisions (March 19, 2012). European Review of Agricultural Economics pp. 1–27 doi:10.1093/erae/jbs043. Available at SSRN: https://ssrn.com/abstract=2735135

Daniel Hellerstein (Contact Author)

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS), Resource and Rural Economics Division ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5613 (Phone)
202-694-5756 (Fax)

Nathaniel Alan Higgins

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5602 (Phone)

John Horowitz

U.S. Department of Agriculture (USDA) ( email )

1 Credit Union Place, Suite 320
Harrisburg, PA 17110
United States

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