Risk, uncertainty and decision-making. An empirical test of Irving fisher’s theory of interest

Buchenrieder G¹* and Balgah RA²

¹Martin-Luther-University Halle-Wittenberg, Institute of Agricultural and Nutrition Sciences, D-06099 Halle (Saale); Germany (Associated Scholar of IAMO)²University of Bamenda, Faculty of Sciences, P.O. Box 39, Bamenda, NW, Cameroon

*Corresponding Author’s Email: Buchenrieder@yahoo.de

Accepted October 9, 2012

Abstract

This paper aims at examining the relevance of Irving Fisher’s theory of interest in explaining agent decision making under conditions of risk and uncertainty created by aggregate natural shocks. A case study approach is applied to empirically test Fisher’s concept of impatience by comparatively analyzing physical and psychic income variables amongst impatient relocated and more patient stationary households, victims of the 1986 lake Nyos natural shock in rural Cameroon. It is demonstrated that significant differences in incomes exist between impatient relocated households, and more patient stationary ones. However, contrary to Fisher’s contention, wealth was generally positively correlated with impatience. The results suggest that Irving Fisher’s theory can be relevant in partially explaining behaviour under conditions of risk and uncertainty. Partiality is attributed by the finding that impatience was rather positively correlated with income, with the exception of income from social capital. There exists a wide gap in current economic and social science literature on the application and test of theories like Fisher’s in understanding and explaining agent decision making, particularly under risky and uncertain conditions resulting from aggregate shocks. The rapid upsurge of natural shocks in recent years requires novel approaches to model agent behavior. This paper highlights the limitations and implications of Fisher’s theory for social policy under shock conditions.

Keywords: Risks, uncertainty, decision-making, Fisher, theory of interest, Cameroon