Differentiating the Effects of Risk-Aversion and Overconfidence among Agricultural Enterprises

Producers are consistently faced with risks and uncertainties when making business decisions. Yet, behavioral economics shows that some producers are often irrational due to overconfident—a misperception of risks.\tThis study proposes a feasible way to disentangle and estimate the effects of overconfidence and risk-aversion on business outcomes. This study utilizes a theoretical characterization of production behaviors and the Ontario Farm Income Database to discern the effects of risk-aversion and overconfidence. Results show that even though risk-aversion decreases the average business outcomes, moderate level of overconfidence would overweigh rationality under certain levels of risk-aversion, giving the agents competitive advantages to survive the market. The results shed light on the distribution of these behavioral traits within the population of Ontario cow-calf operations, and their effects on sector competitiveness which would not be observed otherwise.