Overconfidence and Risk-taking in the Field: Evidence from Ethiopian Farmers

Toman Barsbai*, Ulrich Schmidt, Ulrike Zirpel

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

We argue that overconfidence wrongly inflates the expected returns to a risky income-generating activity. Overconfidence thus increases the willingness to take risks. We test this prediction using a sample of smallholder farmers from Ethiopia who face a risk-return trade-off in their crop cultivation choices. To meet their subsistence needs, these risk-averse farmers arguably have large incentives to wisely manage their risks. We find that overconfident farmers cultivate riskier crop portfolios. The relationship between overconfidence and risk taking is more pronounced for farmers who live near markets or are net sellers. Our results are robust to the inclusion of a wide range of controls (including local fixed effects, use of risk-managing measures, experience of idiosyncratic shocks, socioeconomic characteristics, measures of risk aversion, and personality traits) and instrumental variable estimation. The high volatility of agricultural income may thus not only be the result of a risky environment but also of farmers’ individual psychological biases.
Original languageEnglish
Pages (from-to)1065–1102
Number of pages37
JournalEconomic Development and Cultural Change
Volume70
Issue number3
Early online date4 Mar 2022
DOIs
Publication statusPublished - Apr 2022

Bibliographical note

Funding Information:
We owe special gratitude to Gebrehiwot Ageba for his invaluable support in the design and implementation of the survey. We thank the editor, Marcel Fafchamps, and two anonymous referees for excellent comments. We are grateful to Justin Sydnor for helpful comments on an earlier draft. We also thank conference/seminar participants in Berlin, Hamburg, Kiel, and Munich for discussions. We acknowledge financial support from the Foundation Fiat Panis. All remaining errors are ours. Contact the corresponding author, Toman Barsbai, at toman.barsbai@bristol.ac.uk.

Publisher Copyright:
© 2022 The University of Chicago. All rights reserved.

Structured keywords

  • ECON Applied Economics

Keywords

  • Risk-return tradeof
  • portfolio choice
  • expected returns
  • covariate shocks
  • psychological bias

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