Behavioral Economics and Microfinance: A Study of Risk Preferences in Rural South Africa

Abstract

When deciding between safe and risky prospects, human decision-makers exhibit a number of framing effects. One of the most prominent of these effects, the reflection effect, is the tendency for decision makers to evaluate gambles relative to a reference point, and to act risk-seeking when prospects are framed as losses but risk-averse when identical prospects are framed as gains. This tendency is one of the primary predictions of Prospect Theory, the modified Expected Utility Theory that was proposed by Nobel laureates Daniel Kahneman and Amos Tversky. The present study seeks to closely replicate the work of the Nobel laureates in the cross-cultural setting of rural South Africa with subjects who are extremely poor. Using a similar choice problem to that of Kahneman and Tversky’s Asian Disease Study, we show that subjects exhibit an alternate reversal of risk preferences depending on whether outcomes are presented as Gains or Losses. These results seem to suggest that poor South African women exhibit similar framing effects but that their risk preferences are the complete opposite of the Western Kahneman and Tversky subjects. This study therefore finds a skewed preference for risk and loss in its cross-cultural subjects and suggests that specific decision-making phenomena are not necessarily universal. The implications of this study are wide reaching, as they move closer to a theory of how poverty influences decision-making.