Research by Brian Roe Examines How Well Farmers Tolerate Risk in Comparison to Other Sectors

Jan. 9, 2014

In the most recent issue of Choices, a publication of the Agricultural & Applied Economics Association (AAEA), research by AEDE faculty member Brian Roe examining risk tolerance by U.S. farmers is featured.

In the article, “How Well Do Farmers Tolerate Risk? Comparisons with Nonfarm Business Owners and the General Population,” Roe reflects on the importance of the topic, noting: “Few would disagree that farmers face substantial risks from Mother Nature and markets alike, and that farmers must make crucial decisions balancing risk and reward on a regular basis. However, little consideration has been given to how the risk endemic to farming has shaped who has entered and stayed in farming and the risk tolerance of the farmers that remain.”

As Roe points out, much research exists in regards to evidence that risk-tolerant individuals seek out entrepreneurial occupations, while those who are less risk-tolerant seek out occupations where they are employed by a larger organization. However, there is little analysis to date of how farmers respond to risk in comparison to other entrepreneurial occupations.

In his research Roe worked with a commercial polling firm to gather data via a national phoning survey. Respondents were asked to rate themselves on an eleven point scale in regards to how willing they were to take risks, with one being the least willing and eleven the most willing.

Roe found that 40% of farmers surveyed ranked themselves as having medium levels of risk tolerance, 34% stated that they have high levels of tolerance, and 26% noted that they have low levels of risk tolerance. Meanwhile, amongst nonfarm business owners, the greatest percentage, 44%, said that they had high levels of risk tolerance, 37% reported medium levels, and 20% reported low levels. In comparison, the general population ranked themselves at 39% for medium tolerance, 34% for low tolerance, and 27% for high tolerance. (See Figure 1).

In reporting his findings Roe reflects, “Nearly all population segments have about 40% of people identifying themselves in the middle risk tolerance group. Further analysis confirms that farmers are indeed less risk tolerant than nonfarm business owners. However, farmers are more risk tolerant than the general population sampled.”

In his research Roe found that on average the farmers surveyed were 57.9 years old, while nonfarm business owners were 50.3 years old, and general population participants were 46.8 years old. He notes that this is important as previous studies have shown that as people age they generally exhibit less risk-tolerant behaviors.

Thus, Roe adjusted for differences in age to compare risk tolerance between farmers and nonfarm business owners and found that for those less than 48 years old there are very little differences between the two groups in their risk decision-making. For those aged 48-62 and older than 62, he found that in both groups, nonfarm business owners were more likely to exhibit risk-taking behavior.

To read the full article, click here.

January 9, 2014