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No, insurance works because of the asymmetry of the payoffs. It's a positive sum interaction because the insurer thinks they've priced the policy with enough ma
by jey 8y ago
No, insurance works because of the asymmetry of the payoffs. It's a positive sum interaction because the insurer thinks they've priced the policy with enough margin to make a profit, but you think it's a great deal because it looks cheap enough that you'll buy it even though the thing it guards against is improbable.
- perl4ever 8y agoThat implies buyers of insurance are being tricked, which I don't think is true. Reducing the variance of your costs is worthwhile.
- jey 8y agoI'm not claiming there's trickery involved. It's just a positive-sum trade between two agents. Normally I would write down an example to clarify what I'm saying but not right now, sorry. I agree that the phrase "asymmetric payoffs" is unclear/confusing.