Unobserved heterogeneity in farmers’ risk attitudes: linking risk and loss aversion in semi-arid farming systems of Kenya

Understanding farmers’ risk preferences is central to designing interventions that enhance resilience in fragile agroecosystems such as semi-arid farming systems. However, empirical evidence on the phenomenon and the interrelationship between risk aversion and loss aversion remains limited, particularly in sub-Saharan Africa. This study investigates the drivers of farmers’ risk and loss aversion in the semi-arid counties of South Eastern Kenya using data from 867 randomly selected farm households. A contextualized risk elicitation framework was employed to measure risk preferences, while a Conditional Mixed Process (CMP) estimator was used to jointly model risk and loss aversion and account for correlated unobserved factors. The results reveal that most farmers exhibit both risk and loss averting behavior. Locus of control, wealth endowment, individual aspirations, and exposure to shocks statistically significant influence farmers’ risk attitudes. The findings suggest that strengthening farmers’ asset base, fostering positive behavioral traits, and enhancing resilience to climatic shocks can shape risk preferences in ways that support adaptation and investment decisions. Policies aimed at building resilient semi-arid farming systems should therefore combine post-shock support mechanisms with long-term strategies that promote adaptive capacity and sustained productivity growth.