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Are You Rational?

Ever wonder why those herbicide ads portray weeds as the silent killer of your yields?

Or why farmers cling to the bin keys while markets are rising, only to sweep them clean and race for town after the peak has passed? Or why some farmers will do just about anything to avoid paying taxes – whether it makes sense or not?

Believe it or not, there are some very bright people putting time and energy into pondering the question: Are farmers rational?

We would suggest you don’t need a PhD to answer that question. If farmers were rational creatures, there wouldn’t be any. They’d all be doing something that paid the bills with benefits, like not having to worry about those rain clouds hanging over the hayfield or what those politicians in Ottawa – and Washington – are going to do next.

But that’s not to say this isn’t an area worthy of study.

This is all taking place in the context of behavioural economics – a relatively new field of research that exposes one of the inherent fallacies of classic economic theory – the assumption that we human beings make rational and consistent decisions.

Economists have finally figured out that our decisions are sometimes led by emotions, past experience, and a funny thing call intuition – some of the very things that make us human.

It’s been observed that although people may not always make rational decisions, they tend to be pretty consistent with their irrationalities.

In other words, there is a method to our madness.

As a result, we tend to make predictable and avoidable mistakes. We can – theoretically at least – learn from those mistakes and avoid repeating them. That’s if we become conscious of how our day-to-day decision-making is swayed.

Behavioural economics, which studies the decision-making process, offers some pretty interesting insights to our irrationalities.

For instance, we humans hate losing more than we like winning. “Different choices are made if the same choice is framed as a loss rather than a gain,” says Fabio Mattos, an agricultural economist with the University of Manitoba.

Ever heard the joke about the farmer who wished for good prices and a good crop simultaneously? The genie granted that wish. But when he returned, the farmer was still moping atop his pile of grain. He told the befuddled genie that he simply couldn’t sell – because he might miss out on higher prices.

Fabios told of one experiment in which people were given two choices. If 600 people were at risk, one strategy would allow 200 to be saved. Another strategy would result in 400 people dying.

Seventy-two per cent of respondents favoured the first approach, while only 22 per cent favoured the second – even though they delivered the same result.

We are also guided by what behavioural economists call a “status quo bias.” Translated: “We don’t like change.” And there is that herd instinct. “Worldly wisdom teaches us it is better for your reputation to fail conventionally than to succeed unconventionally,” Mattos told a recent seminar.

As well, “(farmers) exhibit probability weighting that tends to underestimate the price risk.”

Here’s another observation worth pondering. “Farmers who lose money the previous year tend to take more risk than farmers who experienced a gain in the previous year,” he said.

Mattos has embarked on research this year to study how irrational decision-making affects the balance sheet. “Do (farmers) lose or make less money if they behave irrationally?”

There are several types of human decision-making behaviour that might be implicated. Status quo bias is a key one. Rather than explore alternatives, there is a tendency to stick with the traditional methods. That is especially so when some of that risk can be transferred to the taxpayer.

Do farmers have a tendency to make decisions for the current year based on last year’s outcome? Do they place more weight on short-term outcomes and less weight on long-term outcomes? How much do current market prices affect their decisions for a crop that won’t be harvested for months? Does loss aversion cause them to overreact?

“This work is not about individuals making right or wrong decisions, but rather on a better understanding of their decision-making process and the implications,” Mattos noted.

It is not an easy task. And there is an inherent assumption in all this that the environment in which farmers must operate is rational.

Investing in new yield-enhancing technology may seem like a rational strategy, but not if it affects the marketability or the price of your crop. Forward selling your crop to lock in a profit is completely rational– as long as the weather co-operates and you have a crop to sell.

What other business must juggle weather volatility, market unpredictability, environmental sustainability, creditors, agronomic issues, politics and family into their day-to-day considerations?

Maybe we should be asking this question of farming – not farmers. [email protected]

About the author

Vice-President of Content

Laura Rance

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at [email protected]

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