339. Assuming that farmers maximise profit

Agricultural economists building models of agricultural production often use simplistic assumptions about what motivates farmers. The simplest possible assumption — that farmers maximise profits — is still quite commonly made in agricultural economic models. Can this ever be defended? 

One of the papers in the recent AEPP Special Issue of papers on adoption of agricultural innovations is on this topic. The paper is by Alfons Weersink from the University of Guelph and Murray Fulton from the University of Saskatchewan. You can hear my interview with Alfons about the paper here. My conversation with Alfons is available as an episode of the AEPP podcast series.

They point out that many motivations other than profit maximisation have been identified in research about the uptake of new practices by farmers. Other factors that influence them can include risk, leisure, family, social norms, peer pressure, environmental concerns, and altruism.

Weersink and Fulton also picked up a table from an old Pannell Discussion (PD103) in which I suggested that the factors that influence adoption of new practices are likely to vary in different stages of the adoption process. Early on in the process, when farmers are learning from others about the practice, social, cultural and personal factors are likely to play a relatively large role. Later in the process, when farmers have personal experience in using the practice on their own farm, the influence of outsiders will be reduced to some extent. Influences like social norms could still play a role, but the farmer is no longer primarily relying on outsiders for their information.

The finding that farmers are more complex than we might like to assume is reinforced by research in the booming  field of behavioural economics. This has identified a large number of biases that affect people’s decision making. Some relate to the way our brains process information, and some are more about our responses to social situations. This work tells us that farmers will often diverge from profit-maximising behaviour even if they think that’s what they are going for.

Having read the Weersink and Fulton paper a few times (in the course of editing the special issue), it got me thinking about the role of profit in adoption of innovations. Here are some further thoughts.

I think that the main thing driving long-term adoption of a practice is its relative advantage (how well it enhances the achievement of the farmer’s goals). An important element (but, as I said, not the only element) of relative advantage for most farmers is the effect of the practice on profit. There is plenty of evidence that, although various factors influence farmers’ decisions, profit remains one of the main ones. It doesn’t mean that farmers are motivated by wealth for its own sake, but they seek to make money for what it allows them to do.

At the same time, the cognitive biases identified by behavioural economics don’t seem to me to be so large that profit-motivated farmers would make decisions that are really poorly correlated with their objectives.

If I was putting a number on it, I’d say that for Australian farmers, profit explains something like 70% of the variation in adoption between different practices. We can potentially do a more sophisticated analysis to get a more accurate understanding of adoption, but even if we don’t, a 70% understanding is likely to be very useful.

Economists should think carefully about whether some other factor is likely to overwhelm considerations of profit, but in most cases profit at least gives a useful indication of the broad trend in behaviour. If a scientist, an extension agent or a policymaker wants to know whether a new practice or technology is likely to be adopted by farmers, an analysis of its effect on farm profits is bound to be a useful first step.

Why not just include those other motivations in the economic models, to pick up some of the remaining 30%? Because it is much more difficult. The big advantage of modelling profit is that it can relatively easily be quantified, whereas most of the other factors can’t.

So, in summary, my view is that basing agricultural economic models on profit maximisation is often not a crazy thing to do, because it is relatively easy and reasonably useful.

Like all of the papers in the special issue, Alfons and Murray’s paper is free to access.

Further reading

Streletskaya, N.A., S.D. Bell, M. Kecinski, T. Li, S. Banerjee, L.H. Palm-Forster, and D.J. Pannell. 2020. Agriculture Adoption and Behavioral Economics: Bridging the Gap. Applied Economic Perspectives and Policy 42(1), 54-66.

Weersink, A. and M. Fulton. 2020. Limits to Profit Maximization as a Guide to Behavior Change. Applied Economic Perspectives and Policy 42(1), 67-79.

338. Modelling COVID-19

When there is a serious epidemic or a pandemic such as COVID-19, numerous epidemiological modelling groups around the world get busy. How should these various groups be coordinated to generate the most useful information to guide how an outbreak should be managed?

I’m excited to say that I have a new paper out in Science that addresses this question. In doing this project, I got to rub shoulders (in a virtual sense) with an international team of six modellers and epidemiologists from the US, the UK and China.

I was invited to join the team by the lead author, Katriona Shea, an ecologist from Penn State University who specialises in the management of populations of plants and animals and of disease outbreaks. She spent a sabbatical with us in the Centre for Environmental Economics and Policy at UWA in 2018, learning about economics and behaviour.

Katriona found that the sorts of things we do could be useful in her world. Aspects of the design of our proposed modelling process were designed with behaviour change (by modelling teams) in mind.

Here’s an extract from the official news release from Science. The full release is here.

“A new process to harness multiple disease models for outbreak management has been developed by an international team of researchers. The team describes the process in a paper appearing May 8 in the journal Science and was awarded a Grant for Rapid Response Research (RAPID) from the National Science Foundation to immediately implement the process to help inform policy decisions for the COVID-19 outbreak.

During a disease outbreak, many research groups independently generate models, for example projecting how the disease will spread, which groups will be impacted most severely, or how implementing a particular management action might affect these dynamics. These models help inform public health policy for managing the outbreak.

“While most models have strong scientific underpinnings, they often differ greatly in their projections and policy recommendation,” said Katriona Shea, professor of biology and Alumni Professor in the Biological Sciences, Penn State. “This means that policymakers are forced to rely on consensus when it appears, or on a single trusted source of advice, without confidence that their decisions will be the best possible.”

We designed our process to achieve a number of aims.

  1. Get the modelling groups working on the issues that will be most helpful for decision making.
  2. Help decision makers tap into the expertise of the full range of modelling groups. Currently, they sometimes pick a winner and go with the predictions of a single model, ignoring the significant variation between models.
  3. Foster learning between the groups, so as to maximise the quality of predictions made. Currently, when multiple models are used, the usual approach is to just take an average of their results. Our process requires the modelling groups to discuss the reasons for their differences, and to adjust their models if appropriate once they understand those reasons.
  4. Reduce bias in the decision process. Likely biases to guard against include dominance
    effects (agreeing with field “leaders”), starting-point bias or anchoring (focusing on suggestions raised early in the process to the detriment of other ideas), and groupthink (where a psychological desire for cohesiveness causes a group of collaborators to minimize conflict and reach a consensus without sufficient critical evaluation).
  5. Don’t delay the decision-making process.
  6. Make it attractive for the modelling groups to participate in the process.

Our process works as follows.

(a). The decision-making body defines the objective (e.g., minimise caseload), and specifies the management options to be assessed and communicates these to multiple modelling teams (Aims 1 and 2).

(b) The teams model the specified management options, working independently to avoid prematurely locking in on a certain way of thinking (Aims 2 and 4).

(c) The decision-making body coordinates a process where the modelling teams discuss their results, providing feedback and ideas to each other, and learning how they might improve their models (Aim 3).

(d) The teams again work independently (Aim 4) to produce another set of model results with their improved models. The full set of results is collated and considered by decision makers, not just the average (Aim 2).

(e) Information from step (b) can be used for initial decision making, without waiting for steps (c) and (d), so no time is lost (Aim 5). If the new results from step (d) indicate that the best management response is different than initially indicated, the response can be adjusted. We’ve seen plenty of adaptations to strategies over time by governments in the current pandemic.

(f) Benefits for the modelling teams themselves (Aim 6) include that they still essentially operate independently and can publish their own work; that the final quality of their model predictions is probably better; and that they can be confident that their results will be explicitly considered by the decision makers.

In some ways, this might seem like a common-sense approach, but in practice, it is rather different from what is currently done, at least in the contexts that the team of authors is aware of.

It is particularly exciting that Katriona has managed to obtain funding to roll out this approach immediately. She is already working with a collection of modelling groups in the US. The team will share results with the U.S. Centers for Disease Control and Prevention as they are generated.

Further reading

Shea, K., Runge, M.C., Pannell, D., Probert, W., Shou-Li, L., Tildesley, M. and Ferrari, M. (2020). Harnessing the power of multiple models for outbreak management, Science 368(6491), 577-579. Journal web page