Risk Aversion, Subjective Beliefs, and Farmer Risk Management Strategies

The article explores the linkage between risk attitudes and subjective beliefs of an uncertain outcome occurring with a specific focus on agricultural losses due to weather events. Computer assisted face-to-face interviews were conducted with each farmer to elicit their degree of risk aversion, their subjective beliefs on the risk of crop damage from adverse weather events, and a number of characteristics pertaining to them and their farming operation. Due to the infeasibility of conducting experiments involving stakes on the level of annual farm income losses, several measures were undertaken to mitigate potential biases due to the hypothetical nature of the experiments. Prior to implementing the experiments, three different pre-tests were conducted to develop and refine the elicitation mechanisms. In particular, for eliciting subjective beliefs it was critical to identify a natural framing context for subjects to express weather risks and the likelihood of risky prospects.