Farmers have to take decisions in a highly risky world. Their behavior under risk typically results from the combination of the level of their risk exposure and their own risk preferences. Farmer’s risk preferences are usually measured through experimental methods based on Expected Utility Theory. Despite its advantages in term of practical implementation, the latter has received little empirical support.
Application of Cumulative Prospect Theory to the Flemish apple and pear sector
We conducted an incentivized field experiment with apple and pear producers in Flanders to test the most convincing alternative: Cumulative Prospect Theory (CPT). We derive parameters through structural estimations and show that choices made by farmers support CPT. Indeed farmers are found to be highly risk averse but they also do distort probabilities by overweighting small probability of desirable outcomes. Yet contrarily to what the few previous studies found, agents are not loss averse in general.
This results is explained not only by our ability to detect and exclude inconsistent agents but also by the fact that the sector studied is a light subsidy one inducing a self-selection of entrepreneurial farmers. Finally we dig into heterogeneous effects and show that 15% of the sample completely deviate from the representative agent by being extremely loss-averse. Those individuals are relatively young and low educated farmers, having inherited a relatively small farm that they manage alone. The results of this piece of research have strong policy implications and induce the need of considering heterogeneity across and within sectors when it comes to assessing risk preferences.