Invited Session at the AAEA Annual Meetings Seattle, WA, August 12-14, 2012

Title: Attitudes, Perceptions and Values: Determinants of Decision Making

Organizers: Prof. Ellen Goddard, PhD (ellen.goddard@ualberta.ca) and Dr. Carola Grebitus (carola.grebitus@asu.edu)

Moderator: Prof. Ellen Goddard, PhD, ellen.goddard@ualberta.ca
Discussant: Ass. Prof. Wendy J. Umberger, PhD, wendy.umberger@adelaide.edu.au

Session rationale
Understanding decision making by consumers and farmers is critical to effective policy design and implementation whether those policies are aimed at environmental sustainability or at enhancing food safety or animal welfare. Economic theory (consumer and theory of the firm) includes economic variables e.g. prices, income, their variability and socio-demographics, in empirical studies to explain decisions. Inner psychological processes, e.g. risk perceptions, risk attitudes, human values and trust, influence the decisions individuals make but often remain unexplored. In addition, which processes contribute significantly to which decision is far from clear. For example, are preferences for environmentally sustainable foods a product of concerns about environmental risks (public good) or one’s own health risk (private good)? How do risk perceptions relate to a producer’s expected production losses and thus influence their production decisions? Combining economics and psychology is a promising way to enhance understanding of decision making. Examining linkages between psychology and decision making in the context of producers and consumers provides an important comparison that could contribute to effective policies. In this session we aim 1) to highlight the role of values, perceptions and attitudes in producer and consumer decision making and 2) to compare the determinants of decisions in different contexts to illustrate the links between specific decisions and specific values or attitudes. In the session, the contexts considered include producer’s expected crop losses (decisions about participating in crop insurance) linked to risk perceptions, consumer preferences for environmentally sustainable foods, for safe foods and for animal welfare friendly foods linked to risk perceptions and trust traits, and consumer preferences for environmental footprint labeling linked to human values. The similarity in decisions and issues considered provides coherence to the session outcomes. For example, those interested in improving environmental sustainability could discover which inner psychological processes are important to environmental decision making by producers and consumers, whether they are the same or different across decisions (consume or produce) and whether they are critical as compared to other economic or socio-economic determinants of decisions. The analysis highlights triggers of changes in decision making, leading to optimal political regulatory and incentive design for improved environmental sustainability or efficient markets.

Abstracts

Risk Aversion, Subjective Beliefs, and Farmer Risk Management Strategies
Luisa Menapace1, Gregory Colson2, Roberta Raffaelli1

1 Department of Economics, University of Trento, Italy
2 Department of Agricultural and Applied Economics, University of Georgia, USA

Risk and uncertainty are at the heart of the foundations of modern microeconomic theory and are ubiquitous in economic decisions.  In agricultural economics, crop insurance is a critical risk management tool for farmers to protect against yield and revenue losses, smooth income over time, and remain viable in times of catastrophic farm losses.  However, designing crop insurance instruments that simultaneously achieve broad participation among farmers at a low cost to taxpayers has proven formidable for several reasons.  In agricultural production, which is subject to both controllable and uncontrollable risk factors, it is difficult for either party, the farmer or insurer, to accurately assess price or yield risk at the farm-level due to the limited connection between historic and future outcomes and unremitting changes in technology, markets, information, and the environment.  This is further compounded by disconnects between farmer and insurer perceptions/forecasts of risk, and inherent adverse selection issues in insurance markets, which result in ineffective insurance pricing and the need for substantial subsidies to induce farmer participation.
In order to deliver improved risk management tools for farmers that could increase farmer participation, reduce adverse selection, and lessen the need for government subsidization, it is critical to better understand the relationship between the behavioral factors that shape farmers' decisions under uncertainty.  Under subjective expected utility theory (Savage, 1954), an individual's optimal choices are viewed as being shaped by two unrelated components - individual specific subjective probabilities and risk aversion.  Whereas the impact of both features have been explored extensively in the empirical literature (e.g., Binswanger, 1980; Grisley and Kellog, 1983; Harrison, Lau, and Rutstöm 2007; Dohmen et al., 2011), traditional theoretical and empirical treatments have assumed subjective probabilities and risk aversion to be independent factors.  In this study we relax the independence assumption and consider the theoretical and empirical implications of a possible systematic correlation between these two factors - i.e., if individuals who are more risk averse are systematically more optimistic or pessimistic on the likelihood of losses. 
To explore the implications of correlation between subjective probabilities and risk preferences, we proceed in two steps.  In the first section we develop a stylized model of the farmer crop insurance purchase decision.  Using this model we present numerical simulations to demonstrate the implications of potential correlations.  In particular, we show that for any given set of prices, if there is a positive correlation then fewer farmers will purchase the insurance compared to zero or negative correlation.  This, as we show, has significant implications for the (1) nature of adverse selection in crop insurance markets and (2) the cost of achieving a given level of participation.
In the second step, we present experimental evidence exploring whether in fact farmers who are more risk averse are either more optimistic or pessimistic about crop losses.  In the fall of 2011, a random sample of farmers was recruited to participate in a series of experiments with two primary components.  The first was a series of lotteries akin to Eckel and Grossman (2008) to elicit farmers' individual specific risk preferences.  The second was an application of the exchangeability method (Baillon 2008), based on a series of choices among exchangeable events (in the sense of de Finetti, 1937), to assess farmers' subjective probabilities of crop losses due to weather factors.  Using responses from these experiments we assess the existence of a relationship between subjective probabilities and risk aversion using a two-stage least squares regression model to control for endogeneity.  In our regressions, we control for other factors that would be hypothesized to be influential such as farmers’ experience, cognitive ability, membership in a cooperative, and previously experienced crop losses.
Results from the regression analysis indicate that farmers who are more risk averse perceive that the probability of crop losses is smaller (significant at the 5% level). Specifically, we find that an increase of a farmer's constant relative risk aversion coefficient by one unit on average decreases their perceived probability of crop losses by over 10%.   While economic theory does not offer any guidance on what type of relationship might exist, we find this to be a somewhat surprising result.  Farmers who are more risk averse are more optimistic in terms of their likelihood of not suffering a crop loss.  This empirical evidence, as we discuss, has a number of implications.  Critically, it indicates that previous analyses regarding the types of farmers who participate in insurance markets have not fully captured their risk profile and the resulting adverse selection problem in crop insurance markets.
The subject, methods, and findings of this study should appeal to a broad cross-section of attendees of the 2012 AAEA meetings.  In particular, those researchers and policymakers with interests in risk and uncertainty, crop insurance, behavioral and experimental economics.  The specific focus of the paper on farmer decisions in a subjective expected utility framework using recent innovations in experimental methods is new to the literature.  In addition to generating discussion on the behavior of individuals under uncertainty and risk management, it is hoped that this paper will help highlight and motivate new experimental research focusing on the relationship between individual behavior and perceptions on adverse selection in insurance markets.

References

Baillon, A. (2008). “Eliciting Subjective Probabilities through Exchangeable Events: An Advantage and a Limitation,” Decision Analysis 5(2):76-87.
Binswanger, H.P. (1980). "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics 62(3):395-407.
de Finetti, B. (1937). La prévision: Ses lois logiques, ses sources subjectives. Annales de l'Institut Henri Poincaré 7:1–68.
Dohmen, T., A. Falk, D. Huffman, U. Sunde, J. Schupp, and G. Wagner (2011). "Individual Risk Attitudes: Measurment, Deterinants, and Behavioral Consequences," Journal of the European Economic Association 9(3):522-550.
Eckel, C. and P.J. Grossman, (2008). “Forecasting Risk Attitudes: An Experimental Study Using Actual and Forecast Gamble Choices,” Journal of Economic Behavior and Organization 68(1):1-17.
Grisley, W. and E.D. Kellogg (1983). "Farmers' Subjective Probabilities in Northern Thailand: An Elicitation Analysis," American Journal of Agricultural Economics 65(1):74-82.
Harrison, G.W., M.I. Lau, and E.E. Rutstöm (2007). "Estimating Risk Attitudes in Denmark: A Field Experiment," Scandinavian Journal of Economics 109(2):341-368.
Savage, L.J., (1954). The Foundations of Statistics.  New York, Wiley.

Risk Perceptions and Preferences for Ethical and Safety Credence Attributes
Jill E. Hobbs1 and Ellen Goddard2

1 Department of Bioresource Policy, Business & Economics, University of Saskatchewan
2 Department of Resource Economics and Environmental Sociology, University of Alberta
Although consumers’ risk perceptions have become the focus of much research over the past 20 years, the context has been largely real (food safety) risks or perceived risks of the unknown (biotechnology) (Knox 2000). At the same time a variety of credence attributes have become prominent in food markets: environmental sustainability, animal welfare, fair-trade, origin (local, regional, national), etc. Generally, these attributes have been grouped under the broad heading of ethical preferences and analysts relate these attributes strongly to public good aspects of food production (and altruistic preferences). Are these ‘ethical’ preferences different than the growing consumer attention to food safety and health attributes in food products; which has been identified more closely with notions of personal/family risk (Renner et al. 2008). The two are not mutually exclusive: public good aspects to health and food safety attributes and private good (utility) aspects of ethical attributes can be identified. Practically however the question of how and which risks might be driving consumer preferences for these various credence attributes remains open.  This paper explores the drivers of consumer interest in ethical attributes (environmental sustainability and animal welfare) versus food safety attributes taking into account risk perceptions (Smith et al. 2004).
This paper begins with a discussion of the public and private good aspects of consumer preferences for animal welfare, environmental sustainability and food safety attributes, incorporating a discussion of the nature of risk in each of these contexts. Several types of risk perception are identified, including: personal (family) health risk, public health risk, environmental health/sustainability risk, and authenticity risk, wherein a product may or may not genuinely contain specific credence attributes. Conceptually the three credence attributes can be placed on a spectrum from primarily personal risk (private good aspects) to primarily societal risks (public good aspects). Whereas food safety concerns are expected to revolve, for the most part, around perceived health risks to the individual consumer (or family), environmental sustainability concerns are expected to encompass a mixture of public good concerns (impact on environmental health per se), with perhaps an element of personal risk reduction (water quality, perceived health impacts from pesticide use, etc.). Animal welfare concerns are expected to exhibit a slightly different manifestation of the private/public good aspect. On one level, animal welfare can be seen as a purely ethical issue with strong public good externality dimensions: some consumers value improvements in animal welfare regardless of whether they purchase the products derived from these animals. Yet consumers may also wish to use markets to exercise their preferences for specific production systems (free range eggs, outdoor-raised pork, etc.), therefore deriving utility from these purchases. The ‘risk’ in this context is rooted in the underlying information asymmetry concerning the authenticity of the product: trusting whether or not the credence attribute is present. The conceptual discussion of the nature and scope of public/private risk perceptions for food safety and ethical attributes forms a basis for the empirical analysis that follows.
The empirical analysis is drawn from three sets of survey data on consumer food preferences collected within the same timeframe in Canada in 2008. For two studies, surveys were conducted online, with approximately 500 respondents per survey. For the third, over 200 respondents completed surveys at the same time as engaging in actual egg purchase experiments. This third set of survey data examined consumer food safety attitudes and risk perceptions in the context of egg consumption. One of the online surveys probed consumer perceptions of ethical attitudes, with a particular emphasis on environmental sustainability. The second online survey focused on ethical attitudes in the context of animal welfare.
Together, the three data sets enable an exploration of the factors driving food safety, environmental sustainability and animal welfare attitudes among Canadian consumers. The degree to which personal risk factors versus public risk factors drive perceptions are examined. For example, the animal welfare survey captures consumers’ perceptions regarding whether meat from animals reared under production systems with higher welfare standards is healthier or tastier, or whether there are food safety implications from the use of antibiotics, or higher pathogen risks from meat raised in outdoor production systems (Uzea et al., 2011). The survey focusing on environmental sustainability attributes captures perceptions of the link between farming methods and the health of the environment, human health effects (Innes and Hobbs, 2011). The food safety survey calibrates individual attitudes toward food safety in general, the perceived degree of personal health risk in the consumption of eggs, levels of concern with broader food industry issues related to farming production methods, as well as trust in various institutions to assure the safety of food. Comparatively it also captures perceptions of eggs produced under different standards in terms of health, safety and taste (Romanowska, 2009). Authenticity risk is addressed across all three studies through the impact of assurances/certification (labels) on purchases of products with enhanced food safety, environmental sustainability or high animal welfare.
Personal risks versus broader notions of societal risk are themes explored in all three surveys, as is the notion of who consumers trust for information about food safety (ethical attributes). Combining the insights from the three surveys enables us to examine the extent to which confidence in different actors (government, the food industry, farmers) to provide information differs when food safety is the issue in question, versus environmental sustainability or animal welfare assurances. The three data sets also provide a window through which concern over food industry issues can be examined through the lens of food safety versus ethical preferences.
The analysis presented in this paper will contribute to the literature on the drivers of consumer attitudes toward food safety and ethical attributes. A particular contribution of the paper is expanding the notion of how risk is conceptualized in the context of consumer decision-making, and teasing out the extent to which risk affects decisions: from personal health risks to broader environmental health risks. The recognition that these concepts are multifaceted and can be viewed through a private-public good lens has implications for the policy debate around the appropriate role for public and private standards for food safety and ethical standards

References

Innes, B.G. and J.E. Hobbs. 2011. Does it Matter Who Verifies Production Derived Quality? Canadian Journal of Agricultural Economics, 59(1):87-107.
Knox, B. 2000. Consumer perception and understanding of risk from food, British Medical Bulletin, 56 (1) 97-109.
Renner,B., B.Schüz and F. F. Sniehotta. 2008.  Preventive health behavior and adaptive accuracy of risk perceptions. Risk Analysis, 28 (3) 741-748.
Romanowska, P. 2009, Consumer Preferences and Willingness to Pay for Certification of Eggs with Credence Attributes, 224 pages. Unpublished MSc thesis, Department of Rural Economy, University of Alberta.
Smith, E., T. Marsden and A. Flynn, A.  2004. Regulating food risks: rebuilding confidence in Europe's food? Environment and Planning C: Government and Policy, 22: 543 – 567.
Uzea, A., J.E. Hobbs, and J. Zhang. 2011. Activists and Animal Welfare: Quality Verifications in the Canadian Pork Sector. Journal of Agricultural Economics, 62(2):281-304

Personal Values and Decision Making: Evidence from Environmental Footprint Labeling
Carola Grebitus1, Bodo Steiner2 and Michele Veeman3

1Bonn University, Institute for Food and Resource Economics, Germany
2 University College Cork, Department of Food Business and Development, Ireland
3University of Alberta, Department of Resource Economics and Environmental Sociology

Whereas economic analyses generally abstract from individual’s personal values, social psychologists have concluded that human values are among the most powerful explanators of consumer behavior (e.g. Clawson and Vinson, 1978; Alwin and Krosnick, 1985). Values are beliefs about desirable behaviors (standards of desirability) and guide the selection and evaluation of behavior (e.g. Williams, 1968; Schwartz and Bilsky, 1987). Values are a basis for the formation of attitudes, beliefs, and opinions (Rokeach, 1970). Hence, values are hypothesized to play an important role in consistently predicting behavioral intentions, outcomes and explaining variation in economically-relevant behaviors. Understanding values is thus useful to explain consumer demand and develop marketing strategy accordingly (e.g., Muller and Kahle, 1991). The relationship between values and decision making is meaningful for theoretical and empirical economic research. For example, measuring an individual’s values (or proxies such as membership in environmental organizations) provides insight on the individual’s decisions. This helps to segment individuals based on their values and is useful to model choices.
Previous research shows that values have been used to predict many outcomes of importance to economists. It is believed that personal values guide actions, attitudes and judgments (Beatty et al., 1985). Grunert and Juhl (1995) note that the concept of values has received significant attention in the study of consumer behavior and marketing. Further, evidence suggests that values explain a significant portion of the variability in economic outcomes, such as willingness to pay (De Pelsmacker et al., 2005), as well as differences in preferences for products and brands (Vinson et al., 1977). According to Viscusi et al. (2011) environmentally sustainable individual behavior is potentially influenced by personal values of environmental quality and economic incentives. While economic incentives – including the role of environmental policies are well researched little attention has been paid to the influence of private values. Viscusi et al. (2011) analyze whether taking pro-environmental action is based on personal valuation of the environment. Their findings show that private values matter and that individual attitudes towards the environment influence behavior (Viscusi et al., 2011). Furthermore, Grunert and Juhl (1995) note that values can be directed towards individual or collective interests, and thus can be both self-centered and social-centered. Also, they point out that values are thought to be contributing to explaining cross-cultural differences in behavior.
 In this paper, the relationships between personal values and a specific aspect of consumer behavior, namely between environmental attitudes and an individual’s preferences for foods labeled with environmental footprints, are assessed for Canadian and German consumers. It is hypothesized that environmental-related choices are heavily influenced by consumers’ values. Focus on environmentally sustainable foods is of interest given current concerns regarding global warming (IPCC Report, 2007). For example 40% of all climate relevant emissions in Germany are caused by dietary patterns and private consumption (Schächtele and Hertle, 2007). However, even environmentally conscious consumers can adjust their consumption only if they are able to identify ecological sustainable products. In this regard, several countries have established pilot projects to encourage reduction of carbon emissions by providing information through product labeling (e.g., Carbon Counted, Canada). In the UK, Tesco has introduced a carbon footprint label but in many other countries, including Canada and Germany, such labels have been slow to move into the marketplace (e.g. Powers, 2011; Stancich, 2011).
This study analyzes consumer food choices that have a big impact on climate change by means of carbon emission and water usage. Attribute-based choice experiments in which such footprints are identified are applied in two online consumer surveys with 1500 respondents each. The surveys were conducted in 2011 in Canada and in Germany. This comparative approach enables us to compare the influence of personal values on consumer choices in both North America and Europe. The first objective is to explore cross-cultural differences in preferences towards foods with environmental footprints between Europe and North America. The second objective is to assess whether personal values have explanatory power for a specific aspect of consumer preferences and attitudes, namely for environmental concern. To evaluate the potential of a person’s values to predict food choice behavior, an indirect approach is applied. Consumers are segmented according to their values. Then, the strength of the relationship between environmental attitudes and consumer choices is measured.
To isolate preferences for individual product characteristics respondents were asked to make repeated choices between different product versions, characterized by different levels of identified attributes, including carbon and water footprints and price levels. We identified several consumption staples of industrialized countries as the targets of three separate choice experiments, for each of ground beef, yogurt and potatoes. This range of products allows assessment of unprocessed and processed food products, as well as of meat and produce products. The experimental design provides different combinations of price, carbon emission equivalents (carbon footprint label) and water usage (water footprint label).
To classify consumers’ value systems the Rokeach Value Survey (1973) is applied. In the Rokeach Value Survey, which consists of two sets of values, 18 instrumental values (e.g. responsible) and 18 terminal values (e.g. a world at peace) are employed. Subjects rank each value list in order of each value’s relative importance. To identify consumers’ attitudes regarding the environment, participants were asked to respond to statements from the New Environmental Paradigm (Dunlap et al., 2000). The New Environmental Paradigm is a 15-point scale of environmental questions that aims to measure attitudes towards the ‘spaceship’ earth metaphor, i.e. the need to limit growth and being in balance with nature.
Mixed logit models are employed in a first step to analyze consumer preferences for carbon and water footprint labeling without including personal values. In a second step, we use cluster analysis to group consumers according to their values (see De Pelsmacker et al., 2005 for a similar application with regard to Fair Trade products). Then we apply mixed logit models to each cluster to analyze preferences for climate friendly products. Comparing preference estimates from the first step with those from the second step allows assessment of variability in choices that can be attributed to human values. Furthermore, consumers’ environmental attitudes as identified by the New Environmental Paradigm are included as explanatory variables in the choice models. This offers the opportunity to investigate the relationship between personal values, environmental concerns and ‘climate friendly’ food choice. Through this approach we expect to be able to measure the impact of values on preferences for environmental footprint labeling. The results are anticipated to help public policy makers and industry participants alike in the underdeveloped domain of product labeling related to ‘climate friendly’ food products.
References

Alwin, D. F. and J. A. Krosnick (1985). The Measurement of Values in Surveys: A Comparison of Ratings and Rankings. Public Opinion Quarterly 49(04), 535-552.
Beatty, S. E., Kahle, L.R., Homer, P.and S. Misra (1985). Alternative Measurement Approaches to Consumer Values: The List of Values and the Rokeach Value Survey. Psychology & Marketing, 1985(2), 181- 200.
Clawson, C.J. and D.E. Vinson (1978). Values and consumption patterns: A closed loop. In H.K. Hunt (Ed.), Advances in consumer research, 5, 403-407.
De Pelsmacker, P., Driesen, L. and G. Rayp (2005). Do Consumers Care about Ethics? Willingness to Pay for Fair-Trade Coffee. Journal of Consumer Affairs, 39(2), 363-385.
Dunlap, R.E., van Liere, K.D., Mertig, A.G. and R.E. Jones (2000). Measuring Endorsement of the New Ecological Paradigm: A Revised NEP Scale. Journal of Social Issues, 56(3), 425-442.
Grunert, S.C. and H.J. Juhl (1995). Values, environmental attitudes, and buying of organic foods. Journal of Economic Psychology, 16, 39-62.
IPCC (Intergovernmental Panel on Climate Change, eds.) (2007): Summary for Policymakers. In: Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the fourth Assessment Report of the IPCC. Cambridge University Press, Cambridge. http://www.ipcc.ch/pdf/ assessment-report/ar4/wg1/ar4-wg1-spm.pdf, visited 12/4/2011.
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