6 ms·

Insurance is the opposite of a lottery. If you think buying lottery tickets are a waste of money because you lose out in the long run, the same argument should

Insurance is the opposite of a lottery. If you think buying lottery tickets are a waste of money because you lose out in the long run, the same argument should lead you to think having insurance is a good thing.

mkoubaa 6y ago
If insurance was cost effective in the long run, insurance companies wouldn't be profitable
- tehjoker 6y ago
  Insurance schemes do not have to be run for a profit. It's not a law of nature.
- Nasrudith 6y ago
  That is only true in a zero sum system. If insurance can get say 3% profit margin but allows for others to take a riskier approach which overall produces 7% more profit by allowing slimmer margins both can profit. There are risks to that sort of leverage for both parties, especially in black swan events. It is akin to loans essentially - the one taking them may be giving profits to others but that doesn't mean it isn't cost effective.
- ska 6y ago
  You aren't protecting against the expected value though, you are protecting against variance.
  - mkoubaa 6y ago
    No argument there
geewee 6y ago
Why? I'd think the whole point of insurance is that everyone (as an average) loses out in the long run?
- wccrawford 6y ago
  By that same average, everyone loses out on the lottery in the long run, too. But for the few who don't lose, it's worth it. That applies to both insurance and the lottery. The difference, as has already been pointed out, is that insurance prevents a bad scenario, whereas the lottery sometimes results in a good scenario.
yathern 6y ago
I think you have it backwards - insurance and lottery are (sort of) equal. In the long term, you'll lose money in the lottery. You'll also lose money paying for insurance. If you have extraordinary "good luck", you may come out ahead in the lottery. And if you have extraordinary "bad luck" you may come out ahead in insurance. Insurance of course has a more practical value, and a much better return on investment (even if it averages negative returns)
- shoo 6y ago
  this way of framing things is only valid if outcomes of events are somewhat linear, but in real life this isn't true at all: some uninsured bad events can wipe you out completely, whereas insured bad events might not wipe you out. it doesn't matter if your expected value of not being wiped out was predicted to be 0.1 if you've gotten wiped out. the decision of purchasing insurance or not depends more on how many resources or alternatives you have, and if you can easily smooth over an uninsured bad event so that it doesn't wipe you out. for individuals with limited resources who will be wiped out if uninsured, it is very rational to buy insurance, including paying a profit margin to the insurer on top. another way of thinking about insurance is a way for groups of people to pool and share risk -- if they don't get hit by correlated bad luck then they all get to smooth out their bad outcomes.
  - SlavikCA 6y ago
    > for individuals with limited resources who will be wiped out if uninsured Usually, individuals with limited resources can't really be wiped out: there is not much to wipe out. Here is my perspective: I consider myself typical individual with limited resources: I'm mostly live on the my salary (Software dev), I don't really have major assets (20k car bought for cash, renting a house), have some savings (~30k cash). And I only have minimal car liability insurance, as required by law. So, what kind of "wipe out" event can happen to me / my family? And what kind of insurance do I need to get for that? Let's say I have auto accident and I'm liable for million dollars. The likelihood of such event is low. Such event probably would result in bankruptcy, but it's not much worse, then constantly paying extra for insurance. So, there is "no wiping out" in this seemingly catastrophic event. So, what I'm saying is "individuals with limited resources" often doesn't have much to wipe out, so they don't have to worry about insurance.
maest 6y ago
This does not sit nicely with the fact that there are many large and successful insurance companies.
- mcguire 6y ago
  Most insurance companies make their money on their float: the time between money coming in and money going out.
triceratops 6y ago
Insurance protects you from low-probability downsides you can't afford. Lottery tickets are about buying into low-probability upsides. If the loss from not having insurance is bearable, you're better off not buying the insurance. If it's not, it's worth the money even if you'd lose out on average. That's why phone or car insurance (collision and comprehensive) is a waste of money for the average person, but health or homeowners insurance isn't.
- AnimalMuppet 6y ago
  The loss from not having car insurance is not bearable for most people, and therefore is not a waste of money. First, your own car can be tens of thousands of dollars. Most people can't take that hit. Then, even if you drive a pile of junk, the car you hit may be worth tens of thousands of dollars. Finally, there's medical bills if you injure someone. Oh, yeah, and then there's legal requirements that you have car insurance. So no, I don't buy the idea that car insurance is a waste of money. Phone insurance? There I agree with you.
  - triceratops 6y ago
    I should've specified, I meant collision and comprehensive insurance. Liability insurance is legally required, as you said, and I personally take the maximum my insurer offers. Personal liability in an accident is potentially unbounded. This is an example of an unbearable loss that must be protected against, even if it costs money on average. (If there's an outstanding loan on the car, the lender requires collision and comprehensive to cover their asset. Something to consider when financing a car - it's not just the car payment, but also the additional insurance you have to carry) Used cars usually are not "tens of thousands of dollars". If one can't afford even a few thousand dollars in a pinch to buy a used car to replace one's current ride, then one probably needs collision and comprehensive too.
    - SlavikCA 6y ago
      > Personal liability in an accident is potentially unbounded. This is an example of an unbearable loss that must be protected against, even if it costs money on average. Why it is "unbearable loss"? There is saying about that: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem. That may seems unethical, but if you think about it - it's reach people, who lives in our society, who needs to be careful to take care of their risks. Of course, if you have assets to lose - you need to protect them (by buying insurance), but if you are "individual with limited resources" - it's not much different with / without insurance. What I often hear is that poor people (with limited resources) needs to buy extra insurance to protect reach people from their risks. I disagree.
rconti 6y ago
Insurance premiums and the lottery both have expected negative returns. I don't (generally) play the lottery, and I don't (generally) participate in involuntary insurance schemes. I don't buy pet insurance, I don't buy extended warranties; I generally try to avoid paying a third party's payroll, G&A, real estate, taxes, and profits, all on top of the actual expenses I incur that they (hopefully) pay for, after much paperwork. That said, I sure don't carry the bare minimums in auto or health or homeowners insurance because I cannot afford a multi-hundred-thousand-dollar unexpected expense.
- orangecat 6y ago
  I cannot afford a multi-hundred-thousand-dollar unexpected expense. Right, which demonstrates that the expected value of insurance can be positive in terms of utility even if it's negative in dollars. For most individuals, a $100k loss is more than 100 times as bad as a $1020 premium. Meanwhile the insurance provider can absorb individual losses and still come out ahead overall.

mkoubaa 6y ago

If insurance was cost effective in the long run, insurance companies wouldn't be profitable

tehjoker 6y ago
Insurance schemes do not have to be run for a profit. It's not a law of nature.
Nasrudith 6y ago
That is only true in a zero sum system. If insurance can get say 3% profit margin but allows for others to take a riskier approach which overall produces 7% more profit by allowing slimmer margins both can profit. There are risks to that sort of leverage for both parties, especially in black swan events. It is akin to loans essentially - the one taking them may be giving profits to others but that doesn't mean it isn't cost effective.
ska 6y ago
You aren't protecting against the expected value though, you are protecting against variance.
- mkoubaa 6y ago
  No argument there

geewee 6y ago

Why? I'd think the whole point of insurance is that everyone (as an average) loses out in the long run?

wccrawford 6y ago
By that same average, everyone loses out on the lottery in the long run, too. But for the few who don't lose, it's worth it. That applies to both insurance and the lottery. The difference, as has already been pointed out, is that insurance prevents a bad scenario, whereas the lottery sometimes results in a good scenario.

yathern 6y ago

I think you have it backwards - insurance and lottery are (sort of) equal. In the long term, you'll lose money in the lottery. You'll also lose money paying for insurance. If you have extraordinary "good luck", you may come out ahead in the lottery. And if you have extraordinary "bad luck" you may come out ahead in insurance. Insurance of course has a more practical value, and a much better return on investment (even if it averages negative returns)

shoo 6y ago
this way of framing things is only valid if outcomes of events are somewhat linear, but in real life this isn't true at all: some uninsured bad events can wipe you out completely, whereas insured bad events might not wipe you out. it doesn't matter if your expected value of not being wiped out was predicted to be 0.1 if you've gotten wiped out. the decision of purchasing insurance or not depends more on how many resources or alternatives you have, and if you can easily smooth over an uninsured bad event so that it doesn't wipe you out. for individuals with limited resources who will be wiped out if uninsured, it is very rational to buy insurance, including paying a profit margin to the insurer on top. another way of thinking about insurance is a way for groups of people to pool and share risk -- if they don't get hit by correlated bad luck then they all get to smooth out their bad outcomes.
- SlavikCA 6y ago
  > for individuals with limited resources who will be wiped out if uninsured Usually, individuals with limited resources can't really be wiped out: there is not much to wipe out. Here is my perspective: I consider myself typical individual with limited resources: I'm mostly live on the my salary (Software dev), I don't really have major assets (20k car bought for cash, renting a house), have some savings (~30k cash). And I only have minimal car liability insurance, as required by law. So, what kind of "wipe out" event can happen to me / my family? And what kind of insurance do I need to get for that? Let's say I have auto accident and I'm liable for million dollars. The likelihood of such event is low. Such event probably would result in bankruptcy, but it's not much worse, then constantly paying extra for insurance. So, there is "no wiping out" in this seemingly catastrophic event. So, what I'm saying is "individuals with limited resources" often doesn't have much to wipe out, so they don't have to worry about insurance.

maest 6y ago

This does not sit nicely with the fact that there are many large and successful insurance companies.

mcguire 6y ago
Most insurance companies make their money on their float: the time between money coming in and money going out.

triceratops 6y ago

Insurance protects you from low-probability downsides you can't afford. Lottery tickets are about buying into low-probability upsides. If the loss from not having insurance is bearable, you're better off not buying the insurance. If it's not, it's worth the money even if you'd lose out on average. That's why phone or car insurance (collision and comprehensive) is a waste of money for the average person, but health or homeowners insurance isn't.

AnimalMuppet 6y ago
The loss from not having car insurance is not bearable for most people, and therefore is not a waste of money. First, your own car can be tens of thousands of dollars. Most people can't take that hit. Then, even if you drive a pile of junk, the car you hit may be worth tens of thousands of dollars. Finally, there's medical bills if you injure someone. Oh, yeah, and then there's legal requirements that you have car insurance. So no, I don't buy the idea that car insurance is a waste of money. Phone insurance? There I agree with you.
- triceratops 6y ago
  I should've specified, I meant collision and comprehensive insurance. Liability insurance is legally required, as you said, and I personally take the maximum my insurer offers. Personal liability in an accident is potentially unbounded. This is an example of an unbearable loss that must be protected against, even if it costs money on average. (If there's an outstanding loan on the car, the lender requires collision and comprehensive to cover their asset. Something to consider when financing a car - it's not just the car payment, but also the additional insurance you have to carry) Used cars usually are not "tens of thousands of dollars". If one can't afford even a few thousand dollars in a pinch to buy a used car to replace one's current ride, then one probably needs collision and comprehensive too.
  - SlavikCA 6y ago
    > Personal liability in an accident is potentially unbounded. This is an example of an unbearable loss that must be protected against, even if it costs money on average. Why it is "unbearable loss"? There is saying about that: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem. That may seems unethical, but if you think about it - it's reach people, who lives in our society, who needs to be careful to take care of their risks. Of course, if you have assets to lose - you need to protect them (by buying insurance), but if you are "individual with limited resources" - it's not much different with / without insurance. What I often hear is that poor people (with limited resources) needs to buy extra insurance to protect reach people from their risks. I disagree.

rconti 6y ago

Insurance premiums and the lottery both have expected negative returns. I don't (generally) play the lottery, and I don't (generally) participate in involuntary insurance schemes. I don't buy pet insurance, I don't buy extended warranties; I generally try to avoid paying a third party's payroll, G&A, real estate, taxes, and profits, all on top of the actual expenses I incur that they (hopefully) pay for, after much paperwork. That said, I sure don't carry the bare minimums in auto or health or homeowners insurance because I cannot afford a multi-hundred-thousand-dollar unexpected expense.

orangecat 6y ago
I cannot afford a multi-hundred-thousand-dollar unexpected expense. Right, which demonstrates that the expected value of insurance can be positive in terms of utility even if it's negative in dollars. For most individuals, a $100k loss is more than 100 times as bad as a $1020 premium. Meanwhile the insurance provider can absorb individual losses and still come out ahead overall.