A spatial portfolio theory of household location choice

Abstract

Classical residential location choice models were constructed as uncertainty-free. Using the expected utility theorem, urban researchers have dealt with different types of uncertainties, such as uncertain income, uncertain housing price and uncertain transportation cost, etc. This paper, however, considers uncertain traveling frequencies in two-workplace setting, a novel theory on the emergence of a new centre between two existing CBDs can then be formulated. It can be regarded as a spatial portfolio theory as the theory predicts that household location choice would strike a balance between commuting cost savings (return) and variance of the savings (risk). Empirical evidence on the housing transaction price gradient changes in Hong Kong supports the theory.