Irrigation water scarcity poses a critical threat to smallholder farmers in developing countries, particularly in regions like Egypt where agriculture is heavily dependent on controlled water supply. While much research has focused on technological solutions, the psychological and behavioral dimensions of water scarcity remain underexplored. Using cross-sectional survey data from 313 smallholder farmers in Egypt’s Fayoum governorate and applying a Partial Least Squares Structural Equation Modeling (PLS-SEM) approach, this study examines the determinants of smallholder farmers’ perceptions of irrigation water scarcity, with particular emphasis on how psychological distance shapes these perceptions. Results reveal that greater psychological distance significantly reduces farmers’ perceptions of overall consequences of water scarcity (β = -0.588, p < 0.01), with reductions observed across environmental, social, and economic consequences of water scarcity. Mediation analysis shows that institutional trust increases psychological distance, thereby lowering perceived risks, while greater knowledge decreases psychological distance, heightening risk salience. These findings suggest that trust and knowledge influence farmers’ risk perceptions indirectly through their cognitive proximity to the issue. The study highlights the need for communication strategies that reduce psychological distance and foster localized, trust-informed interventions to strengthen adaptive capacity in water-stressed agricultural systems.