Alternative Specifications of Attitudes to Risk in Expected Random Utility Models of Risky Choice



Alternative Specifications of Attitudes to Risk in Expected Random Utility Models of Risky Choice

Authors

X Liu, J Polak, Centre for Transport Studies, Imperial College London, UK

Description

In this paper we investigate the effect of alternative specifications of attitudes to risk in expected random utility models of risky choice. Both theoretical and empirical results are presented.

Abstract

In recent years there has been a growing recognition that conventional models of travellers? decision making need to be extended to accommodate the fact that travellers are often uncertain regarding the outcome of their decisions. The classical approach to the study of risky choice is expected utility theory (EUT). In recent work presented at previous ETCs, Polak and Liu have proposed a framework for integrating EUT and random utility theory (RUT) in a consistent fashion and showed that models developed within the expected random utility theory (ERUT) framework have empirical advantages compared to existing ad hoc applications of EUT to risky transport choice contexts. However, the ERUT models presented so far make a number of very strong behavioural assumptions. The aim of this paper is to present more general forms of these ERUT models and to investigate their performance compared both to conventional ad hoc models and to existing implementations of the ERUT framework.

The existing implementations of the ERUT framework make two rather strong behavioural assumptions. The first is that attitudes to risk are independent of the nature of the uncertain prospect faced by the traveller, in particular that the degree of risk aversion is independent both of the amount of uncertainty involved in a risky decision and the magnitude of the utility pay offs involved. The second assumption is that all attributes that are affected by uncertainty are subject to the same attitude to risk, in effect the assumption is made that attitudes to risk (such as risk aversion) operate at the level of the utility function as a whole rather than at the level of individual attributes. There are plausible theoretical and practical grounds on which to question both these assumptions but to date the there has been no systematic exploration of these important issues of specification.

At the theoretical level, this paper will develop a number of more general models ERUT models, based on concepts of hyperbolic absolute risk aversion (HARA). These HARA models permit much greater flexibility in the representation of attitudes to risk and enable a critical assessment to be made of existing ERUT models (which in effect have assumed constant absolute risk aversion). The HARA based models will also be extended from utility space to attribute space, to enable exploration of attribute-specific attitudes to risk. Empirical results will be presented based on the analysis of data from a stated choice exercise involving risky choice between alternative rail services.

Publisher

Association for European Transport