Negative Serial Autocorrelation Shock Belief
Observational StudyReview
Smallholder farmers who experienced a severe drought shock in the previous year display lower demand for weather index insurance in the subsequent season due to the cognitive heuristic that weather shocks do not occur in consecutive years.
Picture this
Imagine a roulette player who sees red hit five times in a row and decides to bet heavily on black because they believe the wheel is due for a change. A farmer who lost crops to a drought last year assumes next year is guaranteed to have good rain, so they refuse to pay for drought insurance.
What the evidence says
Experiencing a drought shock in the previous year negatively predicted ex-ante demand for insurance (p < 0.05) and reduced actual insurance purchase probability by 7.8 percentage points (marginal effect = -0.0781, p > 0.10).
- Who was studied
- N = 2,399 rural households across 120 Kebeles in Amhara, Ethiopia (baseline) and N = 460 treatment households (uptake regressions).
- How
- Probit regression analyzing contingent valuation willingness to pay and actual purchase against past drought shock experience.
What to do
Educate smallholders on historical multi-year climate probabilities to counter the misbelief that recent droughts reduce the probability of subsequent rainfall deficits.
From the source
"The negative result on the shock in the previous year would be explained if households expect weather shocks to be negatively serially autocorrelated."
Productivity, credit, risk, and the demand for weather index insurance in smallholder agriculture in Ethiopia