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Behavior Economics: Decision Making in a Down Market

Raymond E. Massey

Summary

Behavioral economics considers the effects of psychological, social and cognitive factors on decision making. Behavioral economics challenges the assumption of that decision makers are “rational.” This presentation will introduce the participants to behavioral economics and how it has been used in Missouri to help farmers understand how their decisions may differ when they are in financial stress than when they were not. The extension audiences were given audience response transmitters to register their answers to various questions. Two concepts to be discussed are 1) farmers are loss averse, as opposed to risk averse, and 2) decisions are influenced by the “decision frame” of the decision maker. To illustrate the concept of loss aversion, one illustration changed the word “gain” to “loss” in two otherwise identical questions involving uncertainty. The audience responded to the questions very differently as behavioral economics expected but contrary to what traditional risk management theory would have expected. To illustrate decision framing, leasing agreements were used. Most farmers consider the existing lease payment as the “decision frame” and negotiate from there. In a market where lease rates are decreasing, the decision frame of existing rental rate coupled with loss aversion creates special barriers to negotiation. By introducing other decision frames such as payment of timing and non-financial activities, farmers are better able to overcome the landowner’s primary focus on annual lease payment. This presentation is intended to introduce conference attendees to a branch of economics that is gaining in popularity and can answer unresolved problems in risk management training.

Details

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