Measuring risk preferences in rural Ethiopia

Risk aversion has generally been found to decrease in income. This may lead one to expect that people in poor countries will be more risk averse than inhabitants of rich countries. Recent comparative findings with students suggest the opposite, potentially giving rise to a risk-income paradox. Findings with students, however, may result from selection effects. We test whether a paradox indeed exists by measuring the risk preferences of over 500 household heads across several regions in the highlands of Ethiopia. We do so using certainty equivalents, which are well suited to the task due to their simplicity. We find high degrees of risk tolerance, consistent with the evidence obtained for students using the same tasks. In particular, the level of risk tolerance is higher than the one found for student samples in most Western and even middle income countries. We also find risk tolerance to increase in income proxies within our sample, thus completing the paradox.