ANOMALY IN DECISION MAKING UNDER RISK: VIOLATION OF STOCHASTIC DOMINANCE AMONG FARMERS IN GUJARAT, INDIA

Thiagu RANGANATHAN, Sarthak GAURAV, Ashish SINGH

The paper investigates farmers’ decision making under risk by eliciting their willingness to pay for hypothetical risky income distributions. Our experiments differ from typical experiments on eliciting farmers’ risk attitudes in two ways. Firstly, they do not assume a fixed model of decision making under uncertainty for farmers. Most experiments assume that farmers use expected utility framework while making decision under risk. We do not assume this a priori and we have a test to check if it is so. For this purpose, we use a stochastic dominance approach. In this approach, we first check if farmers adhere to norms of first order stochastic dominance. Only if they do so, we proceed to make comments on risk aversion. As detailed out in the paper, we find that majority of farmers seem to violate the conditions put forth by first order stochastic dominance, and our paper goes on to inquire why that is the case. The second difference is that risk is presented to emanate from a single source as is the case with most experiments. Usually, in such experiments, yield or income is shown to vary. We use a different method where experiments are conducted among two sets of farmers -- for one set of farmers, yield is the risky variable with the price remaining constant; and for another set of farmers, price is kept constant and yield is presented as the risky variable. This kind of a setup allows us to see if the behaviour of the farmers differs on risk being presented as that emanating from price risk and as that emanating from production risk. The findings suggest that farmers do not behave differently in the two cases. But we also find that there are a large number of farmers who violate norms of first and second order stochastic dominance in both cases.