The economics of risk has been a fascinating area of inquiry for at least two reasons. First, there is hardly any situation where economic decisions are made with perfect certainty. The sources of uncertainty are multiple and pervasive. They include price risk, income risk, weather risk, health risk, etc. As a result, both private and public decisions under risk are of considerable interest. This is true in positive analysis (where we want to understand human behavior), as well as in normative analysis (where we want to make recommendations about particular management or policy decisions). Second, over the last few decades, significant progress has been made in understanding human behavior under uncertainty. As a result, we have now a somewhat refined framework to analyze decision-making under risk. The objective of this book is to present this analytical framework and to illustrate how it can be used in the investigation of economic behavior under uncertainty. It is aimed at any audience interested in the economics of private and public decision-making under risk.

In a sense, the economics of risk is a difficult subject; it involves understanding human decisions in the absence of perfect information. How do we make decisions when we do not know some of the events affecting us? The complexities of our uncertain world certainly make this difficult. In addition, we do not understand how well the human brain processes information. As a result, proposing an analytical framework to represent what we do not know seems to be an impossible...