Poverty, happiness, and risk preferences in rural Ethiopia

This paper examines the relationship between risk preferences and self-reported assessments of happiness in life for a sample of peasants from 15 different sites in rural Ethiopia. The relationships were estimated using ordered probit models and the results show that happier subjects were more likely to choose risky alternatives in both real and hypothetical experimental games. The correlation between happiness and willingness to take risk remains positive even when endogeneity of happiness is accounted for using the instrumental variables' estimation technique. The empirical results seem to be consistent with the hypothesis that innate optimism and the resulting overestimation of the probabilities of favourable outcomes by the subjects is the dominant force driving the correlation between happiness and risk preferences. This implies that creating an environment where optimism can flourish may not only help improve social wellbeing but may also encourage entrepreneurial endeavours.