Insurance and Risk Aversion

  • Brian Hillier


In the previous chapters we assumed that all individuals or organisations were risk neutral, that is they were concerned only with the expected yield from an uncertain situation. For many purposes, however, the assumption of risk neutrality may be inappropriate and it is necessary to consider alternative assumptions. In section 5.2 we review the alternative attitudes which may be taken towards risk, and in section 5.3 we show why an individual may wish to purchase insurance to offset risk in a symmetric information setting. The following chapters show how asymmetric information affects the market for insurance: Chapter 6 examines the effects of moral hazard with hidden action, and Chapter 7 looks at the effects of adverse selection. The present chapter closes with some recommended reading and two problems.


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© Brian Hillier 1997

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  • Brian Hillier

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