Why Farmers Lose in Markets

VANCOUVER - Mar 20/07 - SNS -- One of the great mysteries in commodity trading is why people stampede into a commodity even when they know everyone else is doing the same things and there is a high likelihood prices will reverse.

A good answer was provided by Michigan Agricultural Experiment Station (MAES) environmental science and policy researcher Joseph Arvai, who says while the human brain can simultaneously process emotional and empirical information, emotional responses are much stronger in most people than the rational response.

"People tend to have a hard time evaluating numbers, even when the numbers are clear and right in front of them," Arvai said. "In contrast, the emotional responses that are conjured up by problems such as terrorism and crime are so strong that most people don't factor in the empirical evidence when making decisions."

This is obvious in commodity markets. Strong prices in the weeks before seeding attract undecided acres to those particular crops, often resulting too much area being sown. Barring a weather disaster, the resulting over supply results in significantly lower prices.

Faced with this simple and well known cause and effect of supply and demand, affected growers respond emotionally, saying the trade is once again manipulating markets to steal their profit. Significantly, most farmers avoid using or misuse risk management tools which would help them secure a higher average price.

A small percentage of farmers approach seeding decisions differently. One seed plant operator in Saskatchewan always left the final decision about what to seed on land until after supplying seed to his neighbors. He planted what was left and generally experienced above average returns, tending to more frequently grow crops in lower to normal supply.

Arvai and other researchers were not looking at this phenomenon. Instead they asked individuals to consider two risk scenarios common in many state parks in the United States. One involved crime -- vandalism and purse snatching -- and the other involved damage to property from white-tailed deer, such as auto-deer collisions. The participants were asked to indicate which problem required more attention from risk managers.

"The neat thing with crime and deer overpopulation is that both risks could be measured on the same scale, which made our jobs as researchers easier," Arvai explained. "But because crime incites such a negative emotional response from most people, it consistently received more attention, even when the numbers showed that the risks from deer were much worse. We had to ratchet up the deer damage until it was ridiculously high before people noticed that it was a higher risk than crime.

"The bigger problem we've uncovered is that this response isn't limited to crime and deer," he continued. "We see it happening in other areas: terrorism, the war in Iraq and infectious diseases."

Can this heart over head thinking be reversed?

"People can be given tools that help them to 'listen' more to the empirical side of their brains," Arvai said. "But in our experiments, the effects of these tools tend to be relatively short-term. We've been able to make people aware that they're letting their emotions guide them, and we've developed decision aids that help them strike a better balance between their emotions and the numbers. But people tend to revert to decisions guided by emotions once the experiment is over and they leave the room."