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Measuring risk and time preferences in an integrated framework
... There is a clear pattern indicating decreasing relative risk 9 Brooks, Peters and Zank (2013) report that about 70% to 73% of repeated choices matched the initial choices, and provide a short review indicating similar findings by others. Abdellaoui, Kemel, Panin and Vieider (2019) report correlations between 0.75 and 0.8 in an experiment using high stakes with Western students. ...
We present incentivized panel data measuring risk preferences of subsistence farmers from across Ethiopia, and pair them with rainfall data. We use these data to test the hypothesis that risk preferences may adapt to the environment of the decision maker. We find rainfall shocks to decrease risk tolerance for the same individuals over time. We also find that historical rainfall characteristics and geographical features can explain 40% of the variation in preferences across individuals. The time-changing effects are perfectly aligned with the geographical effects we document, painting a unified and highly coherent picture. This provides the first real world evidence that preferences may systematically adapt to the environment of the decision maker.
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