Risk is a multifacted concept that plays an important role for many aspects of life. The incidence of risk is particularly strong in developing countries, where adverse shocks often threaten the very lifelihood of families. The Risk & Development Unit investigates the interplay between risk exposure, individual preferences, and risk management strategies. Some of the topics being investigated are:
- determinants of risk preferences and differences between population groups. It has long been thought that poor people in developing countries are particularly risk averse, which in turn may contribute to their persisting poverty. It increasingly appears, however, that this is not true, at least not in a very simple sense in terms of risk attitudes that one can measure. The unit investigates the relation between household charcteristics and risk preferences, how they are determined, and whether they have predictive value for household decisions.
- relation of risk preferences to behavior and risk management. Risk preferences measured using the tools as we know them from experimental economics and decision theory have a poor track record when it comes to predicting real life behavior. It is, however, largely unclear why this is the case. Abstract representation of decision probelms, the reliance on unnatural probability representations, and large levels of noise may all be factors contributing to this failure. The unit tries to develop measurements of preferences that may close some of this predictive gap.
- risk preferences, time preferences, and trust are all important ingredients in real world decisions. The literature has, however, largely treated them in separation (with a few notable exceptions). One of the central points of the research program is how to integrate these different aspects of decisions in order to obtain a more realistic view of real decision making processes.
- lifting poor people out of poverty likely requires an integrated approach. Preferences may well play a role in development, but most likely it is their interaction with market limitations under the form of large income shocks, the absence of institutional credit, saving, and insurance mechanisms, and low social capital that constitute the real impediment to development. Better understanding such interactions is a further goal of the research unit. For more details, see also the following project site: