Module 1602
Risk Analysis and Risk Management in Agriculture:
Theory and Applications

Instructors

Prof. Dr. Oliver Mußhoff, oliver.musshoff@hu-berlin.de
Humboldt-Universität zu Berlin, Faculty of Life Sciences, Thaer-Institute, Farm Management Group

Prof. Dr. Robert Finger, rofinger@ethz.ch
ETH Zürich, Department of Management, Technology and Economics, Agricultural Economics and Policy Group

Module Description

Many decisions in agriculture and related industries have to be made under uncertainty. Risk, however, adds a considerable degree of complexity to the decision making process. This course presents the theoretical concepts of rational choice under uncertainty and develops the building blocks for risk analysis and risk management in agriculture. We address indicators of the firm’s risk exposition, foundations of stochastic optimization, integrate risk in production economics and different concepts for decision making under risk. We provide hands-on experience in empirical examples and software implementation of stochastic simulation, genetic algorithms, stochastic production functions as well as risk preference elicitation. We provide insights in a wide range of risk management tools, as futures, financial options, real options and crop insurance solutions such as weather derivatives.

Course Outline

Introduction

Classification of risk sources
Systematization of risk management
Distributions, stochastic processes, decision rules

Decision making under risk

Expected Utility Theory
Cumulative Prospect Theory
Risk preference elicitation

Risk management tools and their applications

Management of climate risks: weather derivatives
Expected value variance models: diversification and portfolio theory
Production economics and risk
Stochastic dynamic programming: Real options: types, valuation, examples

Summary and evaluation

Teaching methods:

Lectures (50 %), exercises (30 %), group work (20 %)

Grading: Computer exercises (90 %), participation (10 %)

Credit points: 3

Requirements: Statistics, microeconomics (master level), basic R skills, MS-EXCEL skills

References

Chavas, J.P. (2004): Risk Analysis in Theory and Practice. Elsevier Science & Technology Books.
Dixit, A., Pindyck, R.S. (1994): Investment under Uncertainty. Princeton University Press.
Hardaker, J.B., Huirne, R.B.M., Anderson, J.R., Lien, G. (2004): Coping with Risk in Agriculture. CAB International.

Software: MS-EXCEL, R (www.r-project.org)

Language: English