Abstract/Summary

This paper extends the existing individual decision-making framework of adapting to climate change by considering the effects of prior personal experience in shaping risk preferences. Conducting Prospect Theory-based “lab-in-field” risk experiments in rural areas of Xinjiang Province, we elicit Chinese farmers’ risk curvature and probability bias by adopting more flexible Prelec’s two-parameter probability functions. Using Bayesian approaches to estimation, we find that farmers’ prior experiences not only provide information that influences the subjective distributions of future outcomes but also, by shaping farmers’ personal risk preferences, affects how farmers absorb and update this information. As such, our research suggests that individual risk preferences can evolve, and the effects of personal experience on preferences exhibit distinct patterns depending on whether farmers face benefits or losses. Experiencing production damages tends to make farmers more averse to losses and increases their optimistic bias concerning personal loss risks. A policy implication of these findings is that it is crucial to reduce farmers’ cognitive biases regarding their own climate-related losses and their over-reliance on personal experiences in order to make accurate risk management decisions.