Negative Serial Autocorrelation Shock Belief

In Simple Words

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.

Research question

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.

Participants

N = 2,399 rural households across 120 Kebeles in Amhara, Ethiopia (baseline) and N = 460 treatment households (uptake regressions).

Study Design

Probit regression analyzing contingent valuation willingness to pay and actual purchase against past drought shock experience.

Results

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).

Takeaway

Educate smallholders on historical multi-year climate probabilities to counter the misbelief that recent droughts reduce the probability of subsequent rainfall deficits.

Read alongside the research

Plain-English glossary

Original explanations, informed by the references below. Examples are illustrations, not data from the studies above. The research text stays unchanged.

Baseline

The starting measurements in a study. Researchers use these to compare what participants were like at the start with what happens later.

ExampleBefore a training programme starts, researchers measure workers’ earnings. That first measurement is the baseline.

GET-IT glossary · Baseline characteristics ↗Read more about baseline →

Percentage points

The difference between two percentages.

ExampleA rise from 40% to 50% is 10 percentage points. Relative to the starting value, that is a 25% increase.

Office for National Statistics · Percentages ↗Read more about percentage points →

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