Cornhusker Economics

Cornhusker Economics

Do Hypothetical Choices Indicate True Risk Preferences?
A comparison of stated and revealed data on decisions over risky outcomes
 
Understanding how individuals make decisions when outcomes are risky is of significant interest to policymakers, economists, and businesses. The answer to questions such as why some drivers purchase the minimum legally allowable level of car insurance while others buy higher coverage, or why some producers buy the highest coverage available for crop insurance, while others do not purchase any insurance is that different people have different risk preferences. Risk preferences are varying attitudes or preferences toward different types of risks.

Agricultural risk usually arises from uncertain weather and market outcomes. For example, a producer does not know at the beginning of the season if he/she will receive sufficient precipitation for full yields or if erratic demand and supply conditions in the commodity market will affect output prices. Understanding how a producer will respond to this risk helps policymakers design policies such as crop insurance that help a producer manage risk, or predict the impacts of risk on the use of resources such as land, water, and fertilizer.

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2016 Cornhusker Economics

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