Using experimental economics to understand farmers and water, SAD sufferers and risk-taking
by Kathleen McCoy |
After living through the financial 'experiments' that pumped up the U.S. housing market in the early 2000s, only to smash it like a melon on pavement by 2007, you think we'd be a little wary of whatever experimental economics is.
But in fact, this relatively new field studies the very behaviors that, among other things, lead us to create and fall for market bubbles. There is so much human behavior behind experimental economics that it's sometimes described as psychology with money.
Elmer Rasmuson funded a special chair in economics at UAA in 2001 and Vernon Smith, a Nobel prizewinner specializing in experimental economics, held it from 2003-'06. Others, including experimentalist and resource economist James Murphy of UAA and psychologist Robert Kurzban of the University of Pennsylvania, have served along the way. Now a new experimental economist will take it next fall, Todd Cherry from Appalachian State in the Blue Ridge Mountains of North Carolina.
Recently, I watched one of the team, which is housed within the College of Business and Public Policy, pitch his research to undergraduates. Among professor Jonathan Alevy's curious pursuits: setting up an electronic water market in Chile, and figuring out if humans take more or less economic risk when days grow longer. The results aren't all in, but he's got enough data to talk about each project.
Chile's Electronic Water Market
The project followed Alevy to Alaska from his graduate work at the University of Maryland where he earned a doctorate in agricultural and resource economics in 2006. A fellow student from Chile, Oscar Cristi, had dissertation questions about Chilean farmers and how they handle risk. Alevy and Cristi pondered the questions together, and eventually Cristi tapped Alevy for help.
The farmers live in the Limari Valley in central Chile, north of Santiago. This is home to well-known Chilean wine grapes and other perennial crops. Annual crops, like wheat and corn, also grow here. The area is dry and getting dryer. Rainfall, and especially lack of it, represents considerable risk to farmers.
Already local water associations allocate water from area dams based on individual farmers' water rights. But with low rainfall, available volumes can vary each year. Farmers can sell water they don't need to farmers more desperate for it.
Until recently, water transactions happened through informal face-to-face negotiations between farmers who know each other. A whiteboard at the water association might include scribbles like a phone number and note, "I need water."
Alevy and Cristi wondered if a seasonal electronic market where farmers could offer and bid for extra water as part of a large pool of traders-much like the stock market functions-would optimize the value of scarce water.
Why bother worrying about water value? When a resource is undervalued, it tends to be wasted. Knowing its real value may motivate a farmer to sell what he doesn't need. Or in severe drought conditions, a farmer of annual crops might choose to forego planting for a season and sell his water to a farmer trying to protect an investment in perennials grapes. This could lead to overall improvements in the local economy.
If the perennial farmer fails to find enough water on the market, that's a clear indicator that the valley is over-planted with perennials.
Further, without more information, how can farmers even know the value of water? Cristi had evidence that when farmers sell water face-to-face, prices are very volatile. Think of buying Apple stock from a friend with no information about its price on the NYSE. Placing water on a market helps set its value and make that value transparent.
Alevy and his Chilean colleagues were warned that farmers might be suspicious. Would they warm to the idea of bidding and selling water in an impersonal marketplace?
The short answer is they did. The pilot market is in its third year and serves numerous farmers, including some of the largest producers. In addition to setting the real value for water, the market has introduced safeguards to ensure that when a farmer buys water, he gets it, much like the recent Dodd Frank reforms make U.S. markets more accountable to consumers.
So here's a toast of Chilean chardonnay to that work.
Seasonal Affective Disorder and risk
Now, to the question of whether we're more prone to take economic risks during the long days of an Alaska summer. Or as Alevy asks, "Do we enter the market differently" depending on the seasons.
This is a new area of study; however, data from financial markets do suggest length of day affects us. An existing study of people with Seasonal Affective Disorder (SAD) in Canada showed telling results.
"Those who have SAD seem to shift toward being more risk averse in darker times, going into fall and winter," Alevy said. Conversely in spring, "they seek more risk as the light returns." This financial market data could have implications for the broader population.
That's something I'd like to know a whole lot more about. Stay tuned. Alevy just won a campus Innovate Award to stimulate further investigations.