Why are firms taken to be profit-maximizing? Shouldn't that make them risk-neutral?
Intro texts normally explain that insurance firms (casinos, etc.) "work" by diversifying risk from many clients. Unsaid, then, seems to be that risk is bad for both firm and client.But why should a firm even *need* such diversification, if they merely seek to maximize profits? Likewise why would a firm ever itself be a purchaser of insurance, or spend resources trying to "manage" risk? This seems to be a rather deep oddity in the basic picture we're taught from square one.
You are asking the right questions. With Perfect Certainty firms will look the maximize the net present value of a stream of profits. Without perfect foresight choices with affect the probability of bankruptcy or "catastrophic losses. The firm will have to "risk adjust" its profit stream. This is a very straightforward application of applied microeconomics. I would be happy to discuss this in more depth
