Dealing with low‐probability shocks: The role of selected heuristics in farmers’ risk management decisions

Christoph Duden, Oliver Musshoff and Frank Offermann

Agricultural Economics, 2023, vol. 54, issue 3, 382-399

Abstract: Dealing with weather extremes is a major challenge for farmers and often comes at high costs for public budgets. Therefore, we investigate the influence of specific simplified decision rules, so‐called heuristics, on farmers’ willingness to pay (WTP) for protecting themselves against low‐probability and high‐consequence weather shocks. To this end, we conducted a framed field experiment with 237 farmers in Germany, using incentivized lottery‐based multiple price lists. We explored the effects of different heuristics within the prospect theory framework. Our results indicate that, on average, farmers exhibit risk‐loving behavior towards monetary losses, leading to a low WTP for risk mitigation. The results also suggest that the imitation heuristic, shock experience heuristics, and the threshold of concern heuristic influence farmers’ WTP. Farmers specifically imitate successful farmers when these are risk‐loving. The lack of personal experience with low‐probability events induces farmers to assign less weight to low‐probability shocks, which lowers their WTP. Farmers also systematically assign less weight to low‐probability shocks that they consider “too rare to be concerned about.” Accounting for the use of these heuristics can help design improved risk management instruments and policies.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/agec.12763

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:agecon:v:54:y:2023:i:3:p:382-399

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0169-5150

Access Statistics for this article

Agricultural Economics is currently edited by W.A. Masters and G.E. Shively

More articles in Agricultural Economics from International Association of Agricultural Economists Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().