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A Comparison of Stated and Revealed Risk Preferences using Safety-First

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  • Sharma, Sankalp
  • Schoengold, Karina

Abstract

In this paper we determine the risk preferences of crop producers using the safety-first method. Our methodology is unique, since it utilizes both price and yield risk in the producer’s optimization problem. We then compare the derived preferences with the stated preferences of the producers. The stated preferences are obtained from a lottery-style game designed to elicit producers’ risk preferences. The study is conducted with data from producers in Nebraska, Iowa and South Dakota and the results indicate that there is in fact a relationship between the preferences derived from our structural model and the ones stated by the producers in the game. This is an important result from a policy-making perspective, as it validates the use of behavior elicitation surveys about risk preferences. Such surveys are often easier to administer and less expensive than collecting information on revealed preferences.

Suggested Citation

  • Sharma, Sankalp & Schoengold, Karina, 2016. "A Comparison of Stated and Revealed Risk Preferences using Safety-First," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 236126, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea16:236126
    DOI: 10.22004/ag.econ.236126
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    File URL: https://ageconsearch.umn.edu/record/236126/files/Sharma_Schoengold_2016.pdf
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    References listed on IDEAS

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    1. Campbell, Rachel & Huisman, Ronald & Koedijk, Kees, 2001. "Optimal portfolio selection in a Value-at-Risk framework," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1789-1804, September.
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    3. Koehn, Michael & Santomero, Anthony M, 1980. "Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    4. David Bigman, 1996. "Safety-First Criteria and Their Measures of Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 225-235.
    5. Edgardo Moscardi & Alain de Janvry, 1977. "Attitudes Toward Risk Among Peasants: An Econometric Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 59(4), pages 710-716.
    6. Bawa, Vijay S., 1978. "Safety-First, Stochastic Dominance, and Optimal Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 255-271, June.
    7. Pyle, David H & Turnovsky, Stephen J, 1970. "Safety-First and Expected Utility Maximization in Mean-Standard Deviation Portfolio Analysis," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 75-81, February.
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    Cited by:

    1. John R. J. Thompson & Longlong Feng & R. Mark Reesor & Chuck Grace & Adam Metzler, 2021. "Measuring Financial Advice: aligning client elicited and revealed risk," Papers 2105.11892, arXiv.org.

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    More about this item

    Keywords

    Crop Production/Industries; Farm Management; Institutional and Behavioral Economics; Production Economics; Risk and Uncertainty;
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