Farm decision making under risk and uncertainty

The aim of this paper was to review relevant portions of the risk literature, to relate them to observed behaviour in farm decision-making, and to propose relevant topics for applied agricultural risk research. The concept of decision making under risk and uncertainty was discussed by reviewing the theory of Subjective Expected Utility and its limitations. Subjective Expected Utility theory is the major framework for thinking systematically through complex issues of decision. Limitations of Subjective Expected Utility theory were that its application to unique decisions is doubtful, that it does not contribute to difficulties in determining the available decision alternatives, and that it is cast in a timeless setting, making the theoretic framework to a very limited extent helpful to solve real world decision problems. Most empirical studies indicated that farmers are risk neutral to slightly risk averse. But it was doubtful whether decision makers could be classified according to their risk preferences. A presented overview of applied risk responses revealed much attention for diversification of the enterprise and of production practices, maintaining reserves, and farm expansion. Research reports on observed problems in farm decision making behaviour were lacking. Proposed topics for agricultural risk research included the assessment of the need for a strategic change, the creation of databases to determine both the (co)variances of input and output prices, the effectiveness of various kinds of decision support for different decision problems, and methods for applied scenario analysis to deal with long-run risk.