6 ms·

Well, insurance is just gambling with extra steps. Usually, you bet on something bad happening like your house getting burgled or your flight getting delayed, a

by lpilot 6y ago

Well, insurance is just gambling with extra steps. Usually, you bet on something bad happening like your house getting burgled or your flight getting delayed, and the insurance company takes you up on that bet. In a very abstract way there's not much difference between this and betting on sports.

rjtavares 6y ago
Financial products can usually be traded for three purposes: speculation (or betting), hedging (or insurance) and arbitrage. The product is the same, the name of the action depends on what the buyer is trying to do.
- tomp 6y ago
  But "insurance" isn't strictly a financial product (the kind that's traded on exchange). For example, if you buy life insurance, you can't then resell it (equivalently, I cannot buy insurance on your life) because that would cause some pretty unethical incentives.
  - WJW 6y ago
    You as a client may be unable to resell the insurance (for the unethical incentive reason you mentioned), but big bundles of life insurance policies are definitely traded on a secondary market by the insurance companies. This is called "reinsurance" and allows the insurance company to reduce volatility in cashflows, thereby decreasing capital requirements per policy written and this increasing the total amount of policies that can be written.
  - namibj 6y ago
    Actually, it seems like you can do that in Germany.
  - ashtonkem 6y ago
    You can buy life insurance for other people if there’s an insurable interest. You actually used to be able to purchase life insurance on any other people, although you’re correct on why that’s a bad idea. The darkest examples would be companies in high risk work buying life insurance for workers, which reduces the incentives to provide adequate safety equipment.
Hokusai 6y ago
Except the part where losing your house ruins your life, meanwhile your team losing just ruins your evening. That is the key difference. I agree that for easy to replace items, insurance and sports betting is the same, thou. (If you bet against your own team)
- rob74 6y ago
  Except for the case where you have bet your house on your team...
  - afiori 6y ago
    But this is the point, betting creates the risk in this case, insurance exist to reduce a preexisting risk.
  - Cthulhu_ 6y ago
    That's one's own stupidity then. This is why gambling falls under specific rules - to prevent people from doing stupid things.
Puts 6y ago
It's actually interesting that a lot of countries has laws regulating gambling because of how destructive it can be for an individuals economy, life and general health. Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.
- rbinv 6y ago
  > Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market. Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades. "Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.
  - Legogris 6y ago
    2009 disagrees.
    - rbinv 6y ago
      Who exactly lost their home while paying their mortgage on time? I'm not saying that the GFC wasn't massive (it was) or that people didn't lose their jobs and homes (many did), but MBS were not at fault. Subprime lending was, among other factors.
      - ashtonkem 6y ago
        MBS were the engine that kept a housing mania going. But as you said, they didn’t make people over leverage their own houses. Arguably the originator banks deserve a lot more blame for that, since they actually were the ones willingly handing out bad loans and/or encouraging bad consumer practices.
      - Cthulhu_ 6y ago
        How many people lost their jobs and got into financial problems, is the question you should be asking. Answer: unemployment went from 4.6 to 10%, and it took eight years to recover: http://infographic.statista.com/normal/chartoftheday_8974_us_unemployment_rate_n.jpg http://infographic.statista.com/normal/chartoftheday_8974_us...
phonon 6y ago
The major difference is that insurance is not supposed to put you in a better position than you were before the loss. (This gets slightly tricky when, for example, you insure an item at its replacement cost, instead of its depreciated cost...but that's about as far as it is supposed to extend.)
- deleted 6y ago
  [deleted]
vkou 6y ago
Insurance is gambling that reduces your risk, rather than increases your risk. That's generally the reason for why it's treated differently, by law.
- webmaven 6y ago
  > Insurance is gambling that reduces your risk, rather than increases your risk. Aren't hedge funds (nominally) doing the same thing?
  - vkou 6y ago
    Yes, but hedge funds have a larger counterparty risk. Their hedge is more likely to not work out, than your insurance is to fail to pay up. (And this aspect of insurance is quite heavily regulated.)
afiori 6y ago
I think this is too reductionist as an interpretation. With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation. Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later. Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.
- basilgohar 6y ago
  What you are outlining are the "extra steps" that the GP was alluding to. We call it "risks" but it turns out to be a kind of a gamble that the insurance company takes us up on, but with the house advantage.
  - afiori 6y ago
    But then it is the insurance that is betting on you. Sort of like a Mr Beast video. I would reserve gambling for something offered to some kind of a consumer/costumer market.
  - deleted 6y ago
    [deleted]
- lpilot 6y ago
  You've identified a difference in motive between recreational gambling and insurance, not a mechanical difference. The woman in this article had different motives to the usual insurance customer. The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)". You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet. Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.
  - chaorace 6y ago
basilgohar 6y ago
Agreed wholeheartedly (I posted something similar but hadn't seen your comment before doing so.)
KoftaBob 6y ago
By this logic, any industry that involves measuring probability and minimizing risk is "gambling".
Cthulhu_ 6y ago
No, you bet on nothing happening. Nobody wants to see their holiday ruined, their house burnt, or their health go to shit, but you get insurance so that IF it does happen, and you hope it doesn't, you won't get fucked over financially.
octodog 6y ago
People (typically) buy house insurance to manage their risk to a level that they will tolerate. This creates security and allows for greater investment in something. It's actually completely different to sports betting...
devit 6y ago
Insurance is done to reduce risk, gambling to increase risk. Betting on sports is insurance if and only if you bet against your own team for an amount not greater than the winnings.
- anbende 6y ago
  Gambling does increase risk, but it is not done TO increase risk. Risk is accepted (or embraced) to increase reward. Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.
- Psyladine 6y ago
  No-one gambles to increase risk. Waging a bet against a payout is only superficially different from waging a premium against a catastrophe.
chasing 6y ago
What? Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed. It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.

by lpilot 6y ago

rjtavares 6y ago

Financial products can usually be traded for three purposes: speculation (or betting), hedging (or insurance) and arbitrage. The product is the same, the name of the action depends on what the buyer is trying to do.

tomp 6y ago
But "insurance" isn't strictly a financial product (the kind that's traded on exchange). For example, if you buy life insurance, you can't then resell it (equivalently, I cannot buy insurance on your life) because that would cause some pretty unethical incentives.
- WJW 6y ago
  You as a client may be unable to resell the insurance (for the unethical incentive reason you mentioned), but big bundles of life insurance policies are definitely traded on a secondary market by the insurance companies. This is called "reinsurance" and allows the insurance company to reduce volatility in cashflows, thereby decreasing capital requirements per policy written and this increasing the total amount of policies that can be written.
- namibj 6y ago
  Actually, it seems like you can do that in Germany.
- ashtonkem 6y ago
  You can buy life insurance for other people if there’s an insurable interest. You actually used to be able to purchase life insurance on any other people, although you’re correct on why that’s a bad idea. The darkest examples would be companies in high risk work buying life insurance for workers, which reduces the incentives to provide adequate safety equipment.

Hokusai 6y ago

Except the part where losing your house ruins your life, meanwhile your team losing just ruins your evening. That is the key difference. I agree that for easy to replace items, insurance and sports betting is the same, thou. (If you bet against your own team)

rob74 6y ago
Except for the case where you have bet your house on your team...
- afiori 6y ago
  But this is the point, betting creates the risk in this case, insurance exist to reduce a preexisting risk.
- Cthulhu_ 6y ago
  That's one's own stupidity then. This is why gambling falls under specific rules - to prevent people from doing stupid things.

Puts 6y ago

It's actually interesting that a lot of countries has laws regulating gambling because of how destructive it can be for an individuals economy, life and general health. Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.

rbinv 6y ago
> Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market. Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades. "Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.
- Legogris 6y ago
  2009 disagrees.
  - rbinv 6y ago
    Who exactly lost their home while paying their mortgage on time? I'm not saying that the GFC wasn't massive (it was) or that people didn't lose their jobs and homes (many did), but MBS were not at fault. Subprime lending was, among other factors.
    - ashtonkem 6y ago
      MBS were the engine that kept a housing mania going. But as you said, they didn’t make people over leverage their own houses. Arguably the originator banks deserve a lot more blame for that, since they actually were the ones willingly handing out bad loans and/or encouraging bad consumer practices.
    - Cthulhu_ 6y ago
      How many people lost their jobs and got into financial problems, is the question you should be asking. Answer: unemployment went from 4.6 to 10%, and it took eight years to recover: http://infographic.statista.com/normal/chartoftheday_8974_us_unemployment_rate_n.jpg http://infographic.statista.com/normal/chartoftheday_8974_us...

phonon 6y ago

The major difference is that insurance is not supposed to put you in a better position than you were before the loss. (This gets slightly tricky when, for example, you insure an item at its replacement cost, instead of its depreciated cost...but that's about as far as it is supposed to extend.)

deleted 6y ago
[deleted]

vkou 6y ago

Insurance is gambling that reduces your risk, rather than increases your risk. That's generally the reason for why it's treated differently, by law.

webmaven 6y ago
> Insurance is gambling that reduces your risk, rather than increases your risk. Aren't hedge funds (nominally) doing the same thing?
- vkou 6y ago
  Yes, but hedge funds have a larger counterparty risk. Their hedge is more likely to not work out, than your insurance is to fail to pay up. (And this aspect of insurance is quite heavily regulated.)

afiori 6y ago

I think this is too reductionist as an interpretation. With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation. Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later. Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.

basilgohar 6y ago
What you are outlining are the "extra steps" that the GP was alluding to. We call it "risks" but it turns out to be a kind of a gamble that the insurance company takes us up on, but with the house advantage.
- afiori 6y ago
  But then it is the insurance that is betting on you. Sort of like a Mr Beast video. I would reserve gambling for something offered to some kind of a consumer/costumer market.
- deleted 6y ago
  [deleted]
lpilot 6y ago
You've identified a difference in motive between recreational gambling and insurance, not a mechanical difference. The woman in this article had different motives to the usual insurance customer. The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)". You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet. Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.
- chaorace 6y ago

basilgohar 6y ago

Agreed wholeheartedly (I posted something similar but hadn't seen your comment before doing so.)

KoftaBob 6y ago

By this logic, any industry that involves measuring probability and minimizing risk is "gambling".

Cthulhu_ 6y ago

No, you bet on nothing happening. Nobody wants to see their holiday ruined, their house burnt, or their health go to shit, but you get insurance so that IF it does happen, and you hope it doesn't, you won't get fucked over financially.

octodog 6y ago

People (typically) buy house insurance to manage their risk to a level that they will tolerate. This creates security and allows for greater investment in something. It's actually completely different to sports betting...

devit 6y ago

Insurance is done to reduce risk, gambling to increase risk. Betting on sports is insurance if and only if you bet against your own team for an amount not greater than the winnings.

anbende 6y ago
Gambling does increase risk, but it is not done TO increase risk. Risk is accepted (or embraced) to increase reward. Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.
Psyladine 6y ago
No-one gambles to increase risk. Waging a bet against a payout is only superficially different from waging a premium against a catastrophe.

chasing 6y ago

What? Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed. It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.