Match each of the terms on the left with its definition on the right. Click on the term first and then click on the matching definition. As you match them correctly they will move to the bottom of the activity.
Risk-averse Capital at risk Premium Adverse selection Deductible Pooling Risk-neutral Share Efficient allocation of risk Expected value Diversification Fair insurance policy Random variable State of the world Private information Signalling Risk Financial risk Expected utility Independent events Screening Reputation Moral hazard Positively correlated | uncertainty about future outcomes. the expected value of an individual’s total utility given uncertainty about future outcomes. describes individuals who choose to reduce risk when that reduction leaves the expected value of their income or wealth unchanged. a payment to an insurance company in return for the promise to pay a claim in certain states of the world. an allocation of risk in which those most willing to bear risk are those who end up bearing it. reducing risk by investing in several different things, so that the possible losses are independent events. describes a relationship between events such that each event is more likely to occur if the other event also occurs. a variable with an uncertain future value. information that some people have but others do not. a long-term standing in the public regard that serves to reassure others that private information is not being concealed; a valuable asset in the face of adverse selection. events for which the occurrence of one does not affect the likelihood of occurrence of any of the others. taking some action to establish credibility despite possessing private information; a way to reduce adverse selection. funds that an insurer places at risk when providing insurance. a sum specified in an insurance policy that the insured individual must pay before being compensated for a claim; deductibles reduce moral hazard. an insurance policy for which the premium is equal to the expected value of the claim. the case in which an individual knows more about the way things are than other people do. Adverse selection problems can lead to market problems: private information leads buyers to expect hidden problems in items offered for sale, leading to low prices and the best items being kept off the market. uncertainty about monetary outcomes. in reference to a random variable, the weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring. a strong form of diversification in which an investor takes a small share of the risk in many independent events, so the payoff has very little total overall risk. the situation that can exist when an individual knows more about his or her own actions than other people do. This leads to a distortion of incentives to take care or to expend effort when someone else bears the costs of the lack of care or effort. a partial ownership of a company. using observable information about people to make inferences about their private information; a way to reduce adverse selection. a possible future event. describes individuals who are completely insensitive to risk. |