The Association between Farmers’ Psychological Factors and Their Choice to Adopt Risk Management Strategies: The Case of Pakistan

Agriculture is a risky business, and risk persists in all management decisions taken by a farmer at the farm level. Disrupting agricultural business severely affects the livelihood of individual farmers and negatively affects the country’s economy. To cope with risks, farmers’ tend to mitigate the harsh impact of risks by adopting risk management strategies. Such an adoption decision is affected by several factors, most importantly, the psychological factors, i.e., risk perception and risk attitude of the farmer. Therefore, the purpose of the study is to understand farmers’ risk perception and risk attitude that affect their behaviour in making decisions at the farm level in a risky prospect. The association is investigated by employing chi-squared tests and Cramér’s V. The indirect impact of socioeconomic characteristics of the farmer via their psychological factors is conducted using structural equation model (SEM) path analysis. Their direct impact, together with psychological factors, are examined using the probit model. The two models are compared statistically for better performance and interpretations of the results. From the results, we found that risk perception and risk attitude are the key driving forces of farmers’ decisions during uncertainty which induce them to adopt risk management strategies. Other key variables and their quadratic functions that significantly affect farmers’ behaviour include education level, farming experience, off-farm income, and farm size. Thus, it is vital to consider these factors while assessing farmers’ behaviour in a risky prospect.