Page 407 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory Hitesh Jhanji, Lovely Professional University

Notes
Unit-29: Insurance Choice and Risk

CONTENTS
Objectives

Introduction

29.1 Insurance
29.2 Choice between Insurance and Gambling: Friedman-Savage Hypothesis

29.3 Asset Portfolio Selection
29.4 Summary

29.5 Keywords

29.6 Review Questions
29.7 Further Readings

Objectives

After studying this unit, students will able to:
• Know about insurance.
• Select between insurance and gambling.
• Know asset portfolio selection.

Introduction

An insurance company takes risk of the death of his customer that if he dies then it would pay a big
amount to his family. When an insurance company sells insurance policies then it covers more than
hundreds of families.

29.1 Insurance

There are two characteristics to decrease risk—first, in the view of that person who buys insurance
policy and second, in the view of insurance companies who sell insurance policy.

1. From the Viewpoint of Buyer of Insurance

Insurance is opposite of gambling. It lowers the risk. When a person buys policy for himself or to
protect his dependents or to protect his property from accident, fire, theft etc. unknown incidents,
then he lowers the risk. There is the market of policy because people are risk averse.

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