Handbook of Choice Modelling
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Handbook of Choice Modelling

Edited by Stephane Hess and Andrew Daly

Choice modelling is an increasingly important technique for forecasting and valuation, with applications in fields such as transportation, health and environmental economics. For this reason it has attracted attention from leading academics and practitioners and methods have advanced substantially in recent years. This Handbook, composed of contributions from senior figures in the field, summarises the essential analytical techniques and discusses the key current research issues. It will be of interest to academics, students and practitioners in a wide range of areas.
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Chapter 18: Choice modeling and risk management

Glenn W. Harrison and Jimmy Martínez-Correa


Choice models in economics often present decision makers with a fixed set of alternatives. This setting certainly mimics many naturally occurring decisions, such as the homely selection of products from shelves in a supermarket. But it does not reflect the type of decisions that are the center of attention in the field of risk management, where it is precisely the ability to ‘fine tune’ the choice alternative that is the behavior of interest. It is one thing to ask someone to select between a safe lottery and a risky lottery, where the return on the former is higher than the latter, and another thing to provide a menu of options to change the consequences of risk for each lottery. Of course, this can be viewed as just an expanded choice set, but it is central to understanding how decision makers mitigate risk. They can do so by simply choosing the safer options, or by engaging in a range of activities which alter the risks of those options or the consequences of the options. In many respects this is a natural domain of application for ‘choice modeling,’ as the term is used here, since one can simultaneously discover how decision makers want to structure their choices as well as discover their attitudes to risk. Although our focus is on the economics of risk management, many of the basic ideas have developed in other related disciplines.

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