Source: FARM DOC DAILY, UNIV. OF ILLINOIS, 6/28/19

Psychologists and economists have gathered a large amount of evidence showing that people’s happiness depends on changes in wealth relative to a reference wealth level (i.e., reference point), and that people tend to be more sensitive to losses (i.e., negative change) relative to gains (i.e., positive change). For instance, a person will be sad when she loses $100 but will be happy when she gains $100 in a gamble; and the pain of losing $100 may well surpass the happiness of gaining the same amount of money. These features of human characteristics have been summarized into a theory called prospect theory by Kahneman and Tversky (1979). In the past few decades, this theory has been widely applied in explaining people’s economic decisions in areas such as finance, insurance, and labor supply (see Barberis (2013) for a comprehensive review). However, few studies have applied the theory to understanding farmers’ crop adoption decisions.

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