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What security risks would be caused by using a wireless router with no encryption for the wifi and by configuring it with:
vi /etc/config/wireless
option isolate 1
"HW" isolation. Running OpenWRT. In this way, the wireless clients would be separated and wouldn't be able to capture each others traffic. Or are there still security problems, because a wireless client would still be able to say: "I am 192.168.1.1, route the traffic through me" - even when using "option isolate 1"?
In term of risk, enabling isolation can only be an improvement if you start with an open router without any kind of protection.
Isolation should protect you from DNS poisoning (like the example you wrote) but also from ARP poisoning (see: http://arxiv.org/abs/1404.2172).
the wireless clients would be separated and wouldn't be able to capture each others trafficThat's not true. They will still be able to capture traffic all they want, but they will not be able to communicate with each other intentionally. – forest Jun 1 '18 at 0:48