Linking risk preferences and risk perceptions of climate change: A prospect theory approach
Alexis H. Villacis, Jeffrey Alwang, Víctor Hugo Barrera
Abstract
Abstract This article explores how farmer risk preferences are related to their perception of risk of climate change. We measure risk preferences and risk perceptions using a survey and a lab‐in‐the‐field experiment conducted with one of the most vulnerable groups to climate change in Latin America. We find that farmers that behave in accordance with the assumptions of Prospect Theory —a paradigm where risk preferences are characterized by risk aversion, loss aversion, and probability distortion—are more likely to perceive greater risks of climate change. Our results contribute to the understanding of farmer behavior in developing countries. Moreover, since perception of a risk is a necessary prerequisite for deciding on actions to adapt to climate risk, the results have important policy implications for the development and adoption of new technologies aimed at mitigating the effects of climate change (climate‐smart agricultural technologies).