In this chapter we explore some of the basic elements of the theory of individual behavior in uncertain situations. We discuss why individuals do not like risk and the various methods (buying insurance, acquiring more information, and preserving options) they may adopt to reduce it. More generally, the chapter is intended to provide a brief introduction to issues raised by the possibility that information may be imperfect when individuals make utility-maximizing decisions. The Extensions section provides a detailed application of the concepts in this chapter to the portfolio problem, a central problem in financial economics. Whether a well-informed person can take advantage of a poorly informed person in a market transaction (asymmetric information) is a question put off until Chapter 18.
