Risk

This text presents the microfoundations of risk, uncertainty and its management with application to insurance and finance. It covers the evaluation of risky situations, individual decisions under uncertainty and markets for risk, including market incompleteness and risk transfer and welfare.

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The fundamental topic of choice theory - how do economic agents decide when faced with a situation of risk - and its accompanying theoretical models are here dissected and analyzed. Using a textbook style, the authors present the microfoundations of risk, uncertainty and its management with specific application to insurance and finance. The book analyzes the formal evaluation of risky situations, analyzes individual decisions under uncertainty and determines the markets for risk, including market incompleteness and risk transfer and welfare. It also discusses portfolio choices, insurance decisions and production decisions in situations of risk.