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Choices under Risk in Rural Peru

Francisco Galarza ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper estimates the risk preferences of cotton farmers in Southern Peru, using the results from a multiple-price-list lottery game. Assuming that preferences conform to two of the leading models of decision under risk--Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT)--there is strong evidence of moderate risk aversion. Once we include individual characteristics in the estimation of risk parameters, we observe that farmers use subjective nonlinear probability weighting, a behavior consistent with CPT. Interestingly, when we allow for preference heterogeneity via the estimation of mixture models--where the proportion of subjects who behave according to EUT or to CPT is endogenously determined--we see that the majority of farmers’ choices are best explained by CPT. We further hypothesize that the multiple switching behavior observed in our sample can be explained by nonlinear probability weighting made in a context of large random calculation mistakes; the evidence found on this regard is mixed. Finally, we find that attaining higher education is the single most important individual characteristic correlated with risk preferences, a result that suggests a connection between cognitive abilities and behavior towards risk.

Keywords: risk aversion; probability weighting; mixture models; experimental economics; Peru (search for similar items in EconPapers)
JEL-codes: C9 D81 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-agr, nep-cbe, nep-dev, nep-evo, nep-exp and nep-upt
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Related works:
Working Paper: Choices under Risk in Rural Peru (2009) Downloads
Working Paper: Choices under Risk in Rural Peru (2009) Downloads
Working Paper: Choices under risk in rural peru (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17708

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