Experience of losses and aversion to uncertainty - experimental evidence from farmers in Mexico

Abstract

Farmers' aversion to risk can play a key role in how they make production decisions on the farm. While there is evidence that experience of shocks could alter risk preferences, most of this research relies on just one dimension of risk aversion. Using a series of incentivized lottery games, we estimated a broader set of risk preference coefficients that correspond to cumulative prospect theory, namely the probability weighting function, the curvature of the value function and loss aversion, along with a coefficient for ambiguity aversion. We attempted to understand how past harvest shocks and the sociodemographic characteristics of maize farmers in southern Mexico related to these preference parameters. Our results provide evidence that experience of more severe harvest losses is associated with greater risk aversion and stronger overweighting of small probabilities. Greater harvest shock severity was not related to loss or ambiguity aversion.