In this seminar, Isabel Günther of ETH Zurich discusses a paper that seeks to expand our current knowledge on risk aversion among the poor, with a particular focus on uncertain losses.
Whereas there is a considerable literature on risk aversion in gains — helping to understand limited investments and diffusion of technologies of the poor — little research on how poor villagers perceive uncertain losses exists. It remains, hence, unclear if the empirically often-observed risky behaviors of the poor when it comes to down-side risks are the consequence of a preference for risks in losses, or alternatively the result of budget constraints or high discounting rates for the future.
In this joint UNU-MERIT/Maastricht School of Governance seminar, “Demand for Micro-Insurance? – Risk Aversion in Gains and Losses in Rural Benin”, Isabel Günther of the ETH Zurich Center for Development and Cooperation (NADEL), discusses a paper that seeks to expand our current knowledge on risk aversion among the poor, with a particular focus on uncertain losses. Using a lottery-equivalent setting, experiments were conducted in rural villages of Benin that tested risk aversion not only in small and large stakes of positive outcomes but also of purely negative outcomes, which seemingly has not been done before.
In contrast to experiments in Europe or the USA, the econometric results indicate very high risk aversion in the negative domain (much higher than in the positive domain); this is a sign that poor villagers are highly risk averse when faced with potential losses and no budget constraint and/or timing considerations. Additionally, a strong influence of religious faith on risk aversion was observed. Individuals with stronger faith seem to rely more on god’s good will at the expense of proper risk assessments. Its magnitude indicates that any attempt to increase insurance coverage and ensure its efficiency has to target religious backgrounds as a key factor of success.
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About the speaker
Isabel Günther was appointed as Assistant Professor for Development Economics in September 2008. She had previously been research associate at the Faculty of Economics of the University of Göttingen and at the Harvard School of Public Health. Her main research interest is in empirical microeconomics with a particular focus on welfare implications of risk and uncertainty, health and population economics, economics of water and sanitation, and effectiveness of development aid. Isabel Günther has carried out most of her research in Benin, Burkina Faso, Ethiopia, Uganda and South Africa.