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.

funds that an insurer places at risk when providing insurance.

a partial ownership of a company.

describes individuals who are completely insensitive to risk.

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.

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.

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.

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.

an insurance policy for which the premium is equal to the expected value of the claim.

a possible future event.

describes individuals who choose to reduce risk when that reduction leaves the expected value of their income or wealth unchanged.

uncertainty about monetary outcomes.

an allocation of risk in which those most willing to bear risk are those who end up bearing it.

events for which the occurrence of one does not affect the likelihood of occurrence of any of the others.

using observable information about people to make inferences about their private information; a way to reduce adverse selection.

reducing risk by investing in several different things, so that the possible losses are independent events.

taking some action to establish credibility despite possessing private information; a way to reduce adverse selection.

uncertainty about future outcomes.

information that some people have, but others do not.

the expected value of an individual’s total utility given uncertainty about future outcomes.

a sum specified in an insurance policy that the insured individual must pay before being compensated for a claim; deductibles reduce moral hazard.

describes a relationship between events such that each event is more likely to occur if the other event also occurs.

a payment to an insurance company in return for the promise to pay a claim in certain states of the world.

a variable with an uncertain future value.