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Article gives a good background, but doesn't clearly answer it's own question. The simple answer (although not followed as closely as it should be in regulation

• lotharbot 10y ago
  The way I phrase the simple answer: both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs. With gambling the payoff is random, but with insurance the payoff is coupled predictably to an external negative event.
  • hliyan 10y ago
    I see it this way: insurance is risk sharing. Gambling is competition. Insurance is about risks to yourself and your property. In betting, you are not compensated for your own loss, but some event that may be a loss or a gain or even neutral. I'd say taking out an insurance against a random person's life would still be betting.
    • Mz 10y ago
      Taking out insurance on a random person's life is also illegal. I worked in insurance. I am not a fan of it. But you need insurable interest in someone to take out life insurance on them. Otherwise, people would just insure random strangers and then kill them. This is not hypothetical. One of the forms of insurable interest is key employee life insurance. There have been cases where a business decided to call entry level employees "key employees" so as to take out life insurance, and then these "key employees" kept dying." There have also been historical cases where female serial killers were offing relatives for the insurance money.
  • ucaetano 10y ago
    "both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs" When you take in account that personal utility functions aren't linear, insurance and gambling are no longer slightly-negative-expectation, but usually positive. In other words, if U() is your utility function, U($1M) != 1MU($1). For most people, U($1M) > 1MU($1) and U(-$1M) < 1M*U(-$1).
    • abtinf 10y ago
      > usually positive Is there an example of a voluntary transaction where the expectation is negative?
      • ucaetano 10y ago
        Yes, gambling for small wins can be negative, if you don't include the "excitement" or "entertainment" in the utility function. But then you're not talking about a pure monetary transaction. More like a trade. Which goes back to your point: nobody makes a voluntary transaction where they get less value than they provide. Take charity donations, for example: people value the warm feeling from helping others and a clear consciousness more than the money they are giving.
        • deleted 10y ago
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      • anonymoushn 10y ago
        Sure, for example buying heroin. You have to get through a few steps to agree though! You could disagree by saying that people's "revealed preferences" are their "actual preferences", or by saying that people's utility function after accounting for hyperbolic discounting is their "actual utility function."
        • baddox 10y ago
          Of course in the case of heroin addiction it's easy to poke fun at the notion of time-discounted utility functions, but you can't really shrug off the idea, since it's vital to explaining why people do all sorts of immediately neutral or unpleasant things like brushing their teeth, saving money, or exercising.
    • ouid 10y ago
      Wealth has diminishing marginal utility. You're suggesting that it is increasing.
  • briandear 10y ago
    More accurately, insurance isn't about a 'payoff' it's about being made whole after a covered loss. You don't profit from insurance payoffs. Insurance is designed to mitigate risk as opposed to profiting from it. Insurance is defensive while gambling is offensive.
  • simonbyrne 10y ago
    Not quite: one of the usual characteristics of insurance is the existence of an insurable interest[1]: you must personally have exposure to the risk before you can take out insurance against it. So insurance is really changing a large occasional negative payoff into a smaller more consistent one. [1] https://en.wikipedia.org/wiki/Insurable_interest https://en.wikipedia.org/wiki/Insurable_interest
• wpietri 10y ago
  Well put. And I'd add that insurance is specifically about transferring risk from people who can't handle it to those who can. (Financial derivatives can easily be used to do it the other way.) You could also say that gambling is net negative sum, while insurance is net positive sum. The positive part being the long-term economic benefit of people not having their lives harmed or ended by low-frequency, high-expense events.
  • abtinf 10y ago
    Making value judgements on transactions between consenting parties is a fraught endeavor.
    • wpietri 10y ago
      And yet as voters we must make these value judgments. Gambling for many is a dangerous addiction, one with significant societal costs. You could look at the financial crash of 2007-8 as being mainly about gambling at the institutional scale. When transactions are truly consenting (which is not the case with addicts) and have no negative externalities, sure, we should default to letting people do their thing. But when that's not true, voters, who are the real insurers of last resort for societal risks, end up having to make value judgments.
      • mirimir 10y ago
        > Before the international banking crisis broke in 2007, the total face value of outstanding derivatives contracts was many times larger than the world economy itself. Really? I had no clue that it was that bad.
        • hueving 10y ago
          It sounds bad, but it's not particularly hard to get into that position. If everyone just insures their home, the value out outstanding derivates on peoples is already 1x. Now add in everyone that has mortgage insurance that is protecting lenders on home defaults, and you're already beyond 1x for total outstanding derivatives.
• abtinf 10y ago
  Your statement clearly states the essential distinction. A more concrete way of stating this is: the purpose of gambling is to try to earn an outsized return, while the purpose of insurance is to make you whole in case of loss.
• narrator 10y ago
  No. Insurance is to pay for an outcome that the insured did not want. A person with car insurance does not want to get into an accident. A person with health insurance does not want to get sick. A person with home insurance does not want their house to get flooded. A gambler, on the other hand, is indifferent to the outcome of the roulette wheel except for the monetary payout. Same goes for buying options unless there is ownership of the underlying security. A gambler had an incentive to cheat to make the transaction go their way. An insurer has an incentive to help make the event the insured does not want to happen not happen.
• geon 10y ago
  Insurance is not transfer of risk. Having many ensurees takes the risk away. It becomes inevitable and predictable. Simply a cost.
  • baddox 10y ago
    The cost is the risk. Many people will pay more into insurance than they get out of it (that's obviously a mathematical inevitability), so those people viewed in isolation would be better off self-insuring. Of course, no one knows ahead of time if they're the ones who will be healthy.
    • geon 10y ago
      Im talking about the insurance companies. They dont take any risks, since they know in advance how many accidents that will happen. To them it is just a forseeable cost. The risk of each client is not transferred, but eliminated.
      • colomon 10y ago
        That's simply not true. They work very hard to understand and control the risks they take. But there is an entire field of reinsurance[1], which is insurance for insurance companies against the times they get it wrong, such as major disasters. And even then I suspect you'd find a big enough disaster would break the reinsurance companies too. [1] https://en.wikipedia.org/wiki/Reinsurance https://en.wikipedia.org/wiki/Reinsurance
        • tankenmate 10y ago
          Which is why reinsurance companies take out so called "super cat" (super catastrophe) insurance. Some of the world's bigger super cat insurers are Berkshire Hathaway subsidiaries; National Indemnity is probably the best known one.
  • greenshackle2 10y ago
    It's still a risk. If everyone's houses burn down at once the insurance company will be SOL unless they insured themselves against catastrophes (which they probably do). Also, arguing by definition is pointless, put since we're already debating pointless semantics, google 'risk transfer' and see what comes up.
• noway421 10y ago
  Another way to put it is that the lack of insurance in its turn is indeed gambling. You are imposing a risk onto yourself in order to achieve cash gains, while you could walk away without the risk but with less reward.
• deleted 10y ago
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• sametmax 10y ago
  And liability. Gambling is your risk. Driving is a risk we take together.
• hvidgaard 10y ago
  Insurance is pooling the risk, such that incidents become cheaper but more common (here being insurance cost).
• raverbashing 10y ago
  That's a nice TL;DR Pooling risks makes things more predictable (not sure what's the avg. profit of insurance companies) A small correction, it's: "its own question"
  • ghaff 10y ago
    >not sure what's the avg. profit of insurance companies It varies by company and type of insurance but profit margin seems to be in 5% range or so.
• tuna-piano 10y ago
  Driving a motorcycle also involves the creation of risk where none previously existed. But people seem to make a rational choice to get on their motorcycle. The risk of losing money gambling to me seems less relevant than the risk of getting addicted to gambling and making irrational decisions. There's a 100% chance that when I buy a BMW that I'll lose money, but of course no one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts. That said, solving the problem with prohibition creates the normal prohibition problems (rational adult gamblers lose their rights, black markets are setup, etc). I tend to like the self banning programs that many states have set up. If you feel you are addicted, you can sign a form banning yourself from casinos for a period of time / life. If you go back, you can be arrested for trespassing. And of course, the governments do-gooder motivations seem suspect when the government makes lotteries illegal, but then sets up their own lottery monopoly with absurdly low payout rates.
  • coldtea 10y ago
    >Driving a motorcycle also involves the creation of risk where none previously existed. But people seem to make a rational choice to get on their motorcycle. That's because there are concrete benefits from doing so (going from one place to another). And even with that, there are all sorts of regulations for getting a license to drive a motorcycle, where and how to drive one, what to wear while riding one (a helmet is mandatory in many countries), etc. And even so, if motorcycle related accidents where that many that it would matter, driving one would have been outlawed altogether probably. >There's a 100% chance that when I buy a BMW that I'll lose money Yeah, but you also get a BMW. With gambling you on average just get nothing.
    • averagewall 10y ago
      I think he means that he gets the pleasure of having/using a BMW compared to a gambler who also gets the pleasure of gambling. Both are forms of entertainment and both cause you to lose money.
      • 10y ago
• orblivion 10y ago
  There are further benefits to insurance once it gets more advanced. Actuaries, along with experts studying the domain being insured, find an appropriate price for insuring various different options (ex: living by the shoreline vs however many meters inland) which provides a sort of regulation. It gives consumers a well informed number for any given risk. Even more advanced, they'll start to research new ways to make the activity safer. See: Insurance Institute for Highway Safety. Granted, gambling does give you betting markets which may help predict the future as well. But I would guess for broader topics only. Perhaps someone could enlighten me otherwise.
• bluetwo 10y ago
  I would add that insurance is also for the purpose of facilitating business and society advancement, while gambling is purely for pleasure.
• mikeash 10y ago
  I'd say the fundamental difference is that gambling sometimes provides a huge payout after a small loss, whereas insurance provides a payout roughly equal to the loss. Insurance isn't supposed to have big paydays, it's just supposed to make you whole. Your house insurance might pay out a million dollars, but only if that's what it actually costs to rebuild your house. It's telling that when insurance starts to get away from this model, like people insuring stuff for far more than it's worth, or taking out life insurance policies on strangers, both the law and morality start to frown it.
  • massysett 10y ago
    Life insurance can have huge paydays. The size of the payout is tied only to the premiums paid, not to the size of the loss.
    • CocaKoala 10y ago
      Yeah, but somebody needs to die in order to collect it. Again, the goal is to make a party whole after a loss.
    • gricardo99 10y ago
      But the premiums are tied to the size of the loss, which is what the payout is supposed to cover. The loss you're supposed to be covering is your lost income and other less tangible but quantifiable benefits to your family. Although I'm no expert, I'm guessing underwriting becomes more difficult for policies that are completely out-of-line with your income. There has to be some justification for the payout to meet underwriting standards, which in essence is considering the size of the loss. If you're asking for a policy that is very unusual, it will be much more expensive, if you can get one at all.
  • SilasX 10y ago
    I think I would refine that a bit as, insurance [1] involves payout on an event the insured doesn't want to happen [even given the payout], while a gamble is where the insured does want it to happen [because of the payout]. This matches the historical and in-practice role of the insurer: they try to keep you from overinsuring things, or insuring things you don't have an interest in preventing from happening ("insurable interest"). Both of these create a so-called "moral hazard", the same category that make gambling bad, and vastly increases the fraud they have to deal with. [1] or rather "the kinds of risk transfer we want to allow" vs those we don't
• valuearb 10y ago
  Your definition is good, but you should add that gambling is done for entertainment purposes.
• test6554 10y ago
  Risk aggregated among a large pool is lower than the sum of all the individual risks. Systemically, it makes sense to pool risk.