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I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases you

I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money terms. It's hard to model utility of money curve, economists often use logarithm for convenience (it's easy to do math on logarithms) but whatever the specifics we know the function is concave. No one rational is going to flip a coin for their net worth or any significant part of it for example. With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. In a theoretical case that the fee is 0, that is expected value of money when taking the insurance is 0 you should always take it. In the opening example of 1 in 100 event that would be $1k USD fee. Gambling is the opposite: you voluntarily stake money on event that wouldn't otherwise affect your financial situation. This decreases combined utility of you and your counter-party. Utility is higher if you both have $1000 than if one of you have $0 and the other $2000 for example. Gambling, like excessive drinking or other activities that hurt the population as a whole is viewed as immoral by many moral systems. I think it's hard to argue against that - the more gambling there is the worse off the population is going to be. Not so with insurance.

mungoman2 2y ago
Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"
- greg_V 2y ago
  It's a convoluted way of saying "use value" vs. "exchange value". A million dollars is a million dollars, or it's a house. I don't need a million dollars but I do need a house or I freeze to death. I can't eat a million dollars worth of food but I need to eat food every day or I die. Gambling is seen as immoral because it's about extending your exchange value capabilities, although most people who gamble are poor as dirt and a winning bet is often about paying your utility bills and having a day out over being able to do neither (while losing bets contribute to being unable to do either). Insurance is seen as prudent because it acts as a fail safe over your use values, be it your health, housing, employment, etc. Social security is basically a system of spreading the odds over the population, forcing everyone to do the small bets to contain the catastrophic outlier probabilities - in theory.
  - bluecalm 2y ago
    It doesn't really matter much if you have a million dollars or a million dollar house (+/- liquidity of assets but this is not really important for the discussion). >>Gambling is seen as immoral because it's about extending your exchange value capabilities Why would extending your exchange value capabilities would be seen as immoral? It sounds good to me. I think you are missing the point.
- graemep 2y ago
  Utility is quite a complex and badly defined concept - its also central to economics. The idea is that the value to you of an extra amount of money goes down as you have more. i.e. getting £10k could be life changing for a poor person, unnoticeable to a rich one. https://moneyterms.co.uk/utility/ https://moneyterms.co.uk/utility/ The expected value is the amount multiplied by the chance of getting it. SO if you have a 50% chance of getting £1,000 the expected value is £500. That GP comment is saying is that in the case of insurance the small risk of being wiped out financially vs the certain cost of premiums the expected value is negative (for insurers to be profitable) BUT because the effect on utility of losing a huge amount of money is so bad, the expected value of the utility is positive.
  - pydry 2y ago
    Ive never seen a definition of utility which wasn't self referencing. It's a highly unscientific concept.
    - bluecalm 2y ago
      Utility of money is just how much value one (an individual or entity) can derive from having x amount of money. Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter. It doesn't make it problematic or unscientific. The point is that it matters how much certain amount of money or wealth is worth for you not how much wealth you have. It's an important point as it explains why calculations purely in money terms are useless for making financial decisions (as seen in example of insurance)
      - pydry 2y ago
        >Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter Precisely. Like when a priest says that "love" is "god" and "god" is "love". Plenty of our language is deeply unscientific.
        2y ago
- deleted 2y ago
  [deleted]
- bluecalm 2y ago
  >>Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms" Imagine you have $10k to your name and flip a coin for $1k. Your expected value in money terms is $9k * 0.5 + $11k * 0.5. Your expected value in utility terms is: u($9k) * 0.5 + u($11k) * 0.5 where u is a function that tells you how much worth you get from money. See wikipedia link for some explanation (although I think the articles are over-complicated and don't convey the point in clear way): https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Diminishing_marginal_utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Dimini... The key point is that utility is concave (a coin flip for any amount has negative utility) which is obvious when you think about it (better to be a millionaire than flip a coin to be busted or have 2 million net worth) but maybe not something most people think when making everyday decisions.
- raincole 2y ago
  If you have 10% chance to lose -$91 and 90% chance to get +$10, the expected value in money is -$0.1. It sounds bad. But the relationship between utility and money isn't linear. If for you, $10 is worth 10u and $91 is worth only 89u, this deal has expected value of +0.1u. Why and how isn't it linear? It's a hard problem that can't be answered easily. However we know it's true for most big institutions in stock and bond markets. A financial product will need to provide extra expected value in term of money to compensate the risk, otherwise no one buys it.
  - LorenPechtel 2y ago
    In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar) than it gains (the next dollar.) That's why you should only engage in negative bets, aka insurance. There you are trading a next dollar (worth less) for a previous dollar (worth more).
    - GeorgeDewar 2y ago
      This has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value. I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for. But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
    - raincole 2y ago
      I don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.
- CPLX 2y ago
  A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that are unpredictable can be entertaining, which is why gambling is correctly viewed as a form of entertainment.
  - bluecalm 2y ago
    But why is reducing variance desirable? It's exactly because there is utility of money function which is concave. Variance being undesirable comes from the shape of utility of money function.
    - beaeglebeachedd 2y ago
      And at some point that function bends hard once you hit bankruptcy, for instance many places in US you go to jail if you run out of money, especially if you have children with someone to whom you're not currently married.
    - CPLX 2y ago
      Yes that’s one factor. But there’s also a “going bust” factor which is kind of a fundamental dynamic as well. Think of it in terms of life. Once you are dead you’re dead, it’s the end. If the variance in your life outcomes “crosses the zero line” then the game ends, even if it’s just for an hour. You could bend your argument to cover that by arguing that the utility of that last little fraction tends to infinity. Like what would you exchange for the drink of water that would save your life if you were minutes from death? But it’s a bit strained, especially as a way to explain it to someone for whom utility is not already intuitive. I think it’s pretty easy to understand that excessive variance leads to death or very negative outcomes. All you need to demonstrate it is a houseplant and a supply of water, air, and sunshine. If you increase the variance of any of those three things sufficiently you quickly don’t have a houseplant any more, regardless of the average total supply.
  - 2y ago
TedHerman 2y ago
https://www.foxbusiness.com/money/fred-smith-fedex-blackjack-winning-formula https://www.foxbusiness.com/money/fred-smith-fedex-blackjack...
Narkov 2y ago
> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. Clearly you are protecting an unlikely situation so the utility value of peace of mind would need to be quantified. Gambling has utility too...entertainment. How someone measures that is up to them I guess. Excessive gambling, just like excessive insurance, is wasteful as well. IMHO, I don't think your argument stacks up.
- bluecalm 2y ago
  >>Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. This is wrong and the reason you are confused about the argument. If insurance is priced fairly all parties benefit utility wise. It's true that the buyer has negative expected value money wise and the seller positive one but as the utility function is concave both parties benefit. The important thing is to be able to see value in insurance. Once you are able to see it you will understand why it's worth a premium. One natural question is why the insurer can afford to sell the insurance and not lose expected utility. The answer is that the insurer has a bigger bankroll and the utility curve is flatter for them than it is for the buyer. That's why they can offer a lower premium than an individual in similar position to the buyer would be.
  - JackFr 2y ago
    Insurance is not always a for profit enterprise. There are very many “mutuals” who are literally owned by their policy holders.
    - rcxdude 2y ago
      There is still some cost to the policy holders, though: they still need to pay for the overhead of managing the policies (generally realized via paying the salaries of some employees).
    - ozgrakkurt 2y ago
kgwgk 2y ago
> This decreases combined utility of you and your counter-party. The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.
- noitpmeder 2y ago
  Also casinos typically take rakes in poker
  - jack_pp 2y ago
    index funds also take a fee
  - treme 2y ago
    Effect of rake makes it such that only about 5% of players show profit in the long run.
- Frummy 2y ago
  The edge you have from selling insurance is selling psychological safety, people pay to not feel negative. Maybe some gamblers can recognise moments they've been irritated where some rule requires insurance, "let me embrace the risk on my own dammit"
  - dartos 2y ago
    The edge they have is providing more utility for you dollar, as OP said. That kind of edge is just having a good or service someone would pay for.
skizm 2y ago
This is the reason I always play the lottery. I won't miss $2 a week or whatever, but I will notice if I win an 8+ figure payout.
- dartos 2y ago
  Are your odds better than waiting payout/$2 * days buying lotto tickets?
- bluecalm 2y ago
  2$ per week for a few years is a day off work or a few stake dinners. You could definitely notice it if you wanted.
JumpCrisscross 2y ago
> insurance is a service worth paying for as long as the fee is lower than utility you gain from it Critically, the variable that makes gambling rational is the hedonistic pleasure one derives from it. Insurance versus gambling seems like a penetrating question, but as you describe, it really is not. The more-germane one is gambling versus drinking or theme parks or mindless television.
pfannkuchen 2y ago
Isn’t this typically explained via marginal utility, not just utility? You can’t really compare the utility of the same amount of money in the hands of different people, but for a single person each additional unit of money is worth less than the last along some non-linear curve. The $1k you spend on insurance is further along this curve than the first $1k of the insured loss (and the second, and the third, etc) and if you do the naive expected value calculation it ignores this curve.
mrazomor 2y ago
> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Why even consider the insurance as investment (money increasing tool)? A stock market would get you higher gains at more controlled risk. The 3rd best financial advice I got is about insurances: "Pay the insurance only if the negative outcome would cause you a significant financial loss" (and is of relatively high probability) So, insuring a house from fire etc. makes sense. But, my $2k bike is not worth covering (from my PoV). Or, if we go to extreme, my (unnecessary) motorbike/boat/jet ski as if they are destroyed, I can continue living without them (a bit of exaggerated example, but I hope you get my point). Same for insuring a house from unlikely events.
- kgwgk 2y ago
  > Why even consider the insurance as investment (money increasing tool)? Most people wouldn't consider it in that way - unless the risk they're insuring is terribly mispriced or they plan to do some insurance fraud.
- LorenPechtel 2y ago
  Disagree on the probability bit. The important part is the severity of the negative outcome. And if you can't afford to lose the toy you couldn't afford to buy it in the first place. Thus toys should never be insured. (That is, of course, assuming they aren't mispricing it. I've seen a situation like that where I considered it: There are companies that offer small-appliance warranties at approximately an x% of price model--reliability doesn't enter into it. If you know that with your use case the product is likely to fail within the warranty... But some searching shows the real business model is to make it nearly impossible to actually make your claim.)
  - dangus 2y ago
    > And if you can't afford to lose the toy you couldn't afford to buy it in the first place. Thus toys should never be insured. You’re getting this wrong. Being unable to afford to lose a toy doesn’t mean you weren’t able to afford it, it means you weren’t able to afford buying it twice. It works the same way with home insurance. I can afford the house. I can’t afford two houses if my current house burns down and I need to buy another one.
ivancho 2y ago
You haven't demonstrated most of these assertions. For example, if everyone gambled against everyone else every second, then that system has a pretty good chance of staying close to equilibrium for a long time, whereas your model indicates that the total utility would be depleted almost immediately. Whereas if everyone was fully insured for absolutely every risk in their life and immediately received a replacement of the exact same value on any loss, then the overall system would just steadily trend to all the money ending at the insurer, which doesn't seem like increased total utility
- bluecalm 2y ago
  >>You haven't demonstrated most of these assertions. For example, if everyone gambled against everyone else every second, then that system has a pretty good chance of staying close to equilibrium for a long time >>whereas your model indicates that the total utility would be depleted almost i Can you describe specific assumptions about how that "everyone gambling against everyone else" would look like? I just don't see how my model could predict total utility being depleted very quickly while the model having good chance to stay close to equilibrium. My model is very simple: apply utility function on wealth. When you model people flipping coins against each other you will see a lot of busted ones and a lot of rich ones pretty quickly and that will mean significant utility decrease.
  - ivancho 2y ago
    Ok, take 100 people, with $100 each, and have one round of $1 coin flips between each 2. A significant number of bets overall, 4950. Each person has wagered 1% of their net worth 99 times, something that we all agree sounds quite scary. And yet there will be no busted people, most will likely be between $80 and $120. Repeat this 10 times, a ridiculous amount of gambling - still most likely no bankruptcies, and the total utility, if we assume log, has barely dropped by 1%. I simply do not believe that we are making such a subtle societal optimization by frowning upon gambling while encouraging all kinds of other risk taking, like investments and properties. And the other scenario where insurance just acts as a drain on the overall system seems to indicate that it is not inherently positive for utility either
EVa5I7bHFq9mnYK 2y ago
Gambling can be a completely rational thing to do. If you are old, poor and tired, your odds to become a millionaire from work are exactly zero. But if you buy a lottery ticket, you buy yourself a week of hope, adrenaline, and a non-zero chance for a life of your dreams.
eddd-ddde 2y ago
That insurance companies are able to make a profit implies that in the aggregate, people lose money on it, just as with gambling.
- bluecalm 2y ago
  "Food companies are able to make profit implies that in the aggregate, people lose money on it, just as with gambling". The argument is simply incorrect. Insurance companies provide a service, not +EV (money wise) investment. Same as any other service companies - they make profit, the customers benefit.
- EasyMark 2y ago
  Not losing money so much as making money for a service (insurance). Hopefully it’s reasonable one and not exorbitant for the customer if there’s enough competition in the insurance market

mungoman2 2y ago

Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

greg_V 2y ago
It's a convoluted way of saying "use value" vs. "exchange value". A million dollars is a million dollars, or it's a house. I don't need a million dollars but I do need a house or I freeze to death. I can't eat a million dollars worth of food but I need to eat food every day or I die. Gambling is seen as immoral because it's about extending your exchange value capabilities, although most people who gamble are poor as dirt and a winning bet is often about paying your utility bills and having a day out over being able to do neither (while losing bets contribute to being unable to do either). Insurance is seen as prudent because it acts as a fail safe over your use values, be it your health, housing, employment, etc. Social security is basically a system of spreading the odds over the population, forcing everyone to do the small bets to contain the catastrophic outlier probabilities - in theory.
- bluecalm 2y ago
  It doesn't really matter much if you have a million dollars or a million dollar house (+/- liquidity of assets but this is not really important for the discussion). >>Gambling is seen as immoral because it's about extending your exchange value capabilities Why would extending your exchange value capabilities would be seen as immoral? It sounds good to me. I think you are missing the point.
graemep 2y ago
Utility is quite a complex and badly defined concept - its also central to economics. The idea is that the value to you of an extra amount of money goes down as you have more. i.e. getting £10k could be life changing for a poor person, unnoticeable to a rich one. https://moneyterms.co.uk/utility/ https://moneyterms.co.uk/utility/ The expected value is the amount multiplied by the chance of getting it. SO if you have a 50% chance of getting £1,000 the expected value is £500. That GP comment is saying is that in the case of insurance the small risk of being wiped out financially vs the certain cost of premiums the expected value is negative (for insurers to be profitable) BUT because the effect on utility of losing a huge amount of money is so bad, the expected value of the utility is positive.
- pydry 2y ago
  Ive never seen a definition of utility which wasn't self referencing. It's a highly unscientific concept.
  - bluecalm 2y ago
    Utility of money is just how much value one (an individual or entity) can derive from having x amount of money. Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter. It doesn't make it problematic or unscientific. The point is that it matters how much certain amount of money or wealth is worth for you not how much wealth you have. It's an important point as it explains why calculations purely in money terms are useless for making financial decisions (as seen in example of insurance)
    - pydry 2y ago
      >Utility and value might be defined by self referencing each other but that's true for many other concepts or words in a language for that matter Precisely. Like when a priest says that "love" is "god" and "god" is "love". Plenty of our language is deeply unscientific.
      - 2y ago
deleted 2y ago
[deleted]
bluecalm 2y ago
>>Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms" Imagine you have $10k to your name and flip a coin for $1k. Your expected value in money terms is $9k * 0.5 + $11k * 0.5. Your expected value in utility terms is: u($9k) * 0.5 + u($11k) * 0.5 where u is a function that tells you how much worth you get from money. See wikipedia link for some explanation (although I think the articles are over-complicated and don't convey the point in clear way): https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Diminishing_marginal_utility https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Dimini... The key point is that utility is concave (a coin flip for any amount has negative utility) which is obvious when you think about it (better to be a millionaire than flip a coin to be busted or have 2 million net worth) but maybe not something most people think when making everyday decisions.
raincole 2y ago
If you have 10% chance to lose -$91 and 90% chance to get +$10, the expected value in money is -$0.1. It sounds bad. But the relationship between utility and money isn't linear. If for you, $10 is worth 10u and $91 is worth only 89u, this deal has expected value of +0.1u. Why and how isn't it linear? It's a hard problem that can't be answered easily. However we know it's true for most big institutions in stock and bond markets. A financial product will need to provide extra expected value in term of money to compensate the risk, otherwise no one buys it.
- LorenPechtel 2y ago
  In the real world it always goes the other way--the next dollar is never worth as much as the previous dollar, thus any fair bet costs more (the previous dollar) than it gains (the next dollar.) That's why you should only engage in negative bets, aka insurance. There you are trading a next dollar (worth less) for a previous dollar (worth more).
  - GeorgeDewar 2y ago
    This has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value. I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for. But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
  - raincole 2y ago
    I don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.
CPLX 2y ago
A simpler way of explaining it is that both activities have a negative expected value but insurance usually reduces variance while gambling increases it. In the context of money variance is usually synonymous with instability and unpredictability. Those things are bad and it’s worth paying a fairly priced premium to avoid them. In simple math terms gambling is essentially the opposite dynamic. Of course things that are unpredictable can be entertaining, which is why gambling is correctly viewed as a form of entertainment.
- bluecalm 2y ago
  But why is reducing variance desirable? It's exactly because there is utility of money function which is concave. Variance being undesirable comes from the shape of utility of money function.
  - beaeglebeachedd 2y ago
    And at some point that function bends hard once you hit bankruptcy, for instance many places in US you go to jail if you run out of money, especially if you have children with someone to whom you're not currently married.
  - CPLX 2y ago
    Yes that’s one factor. But there’s also a “going bust” factor which is kind of a fundamental dynamic as well. Think of it in terms of life. Once you are dead you’re dead, it’s the end. If the variance in your life outcomes “crosses the zero line” then the game ends, even if it’s just for an hour. You could bend your argument to cover that by arguing that the utility of that last little fraction tends to infinity. Like what would you exchange for the drink of water that would save your life if you were minutes from death? But it’s a bit strained, especially as a way to explain it to someone for whom utility is not already intuitive. I think it’s pretty easy to understand that excessive variance leads to death or very negative outcomes. All you need to demonstrate it is a houseplant and a supply of water, air, and sunshine. If you increase the variance of any of those three things sufficiently you quickly don’t have a houseplant any more, regardless of the average total supply.
- 2y ago

TedHerman 2y ago

https://www.foxbusiness.com/money/fred-smith-fedex-blackjack-winning-formula https://www.foxbusiness.com/money/fred-smith-fedex-blackjack...

Narkov 2y ago

> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. Clearly you are protecting an unlikely situation so the utility value of peace of mind would need to be quantified. Gambling has utility too...entertainment. How someone measures that is up to them I guess. Excessive gambling, just like excessive insurance, is wasteful as well. IMHO, I don't think your argument stacks up.

bluecalm 2y ago
>>Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. This is wrong and the reason you are confused about the argument. If insurance is priced fairly all parties benefit utility wise. It's true that the buyer has negative expected value money wise and the seller positive one but as the utility function is concave both parties benefit. The important thing is to be able to see value in insurance. Once you are able to see it you will understand why it's worth a premium. One natural question is why the insurer can afford to sell the insurance and not lose expected utility. The answer is that the insurer has a bigger bankroll and the utility curve is flatter for them than it is for the buyer. That's why they can offer a lower premium than an individual in similar position to the buyer would be.
- JackFr 2y ago
  Insurance is not always a for profit enterprise. There are very many “mutuals” who are literally owned by their policy holders.
  - rcxdude 2y ago
    There is still some cost to the policy holders, though: they still need to pay for the overhead of managing the policies (generally realized via paying the salaries of some employees).
  - ozgrakkurt 2y ago

kgwgk 2y ago

> This decreases combined utility of you and your counter-party. The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.

noitpmeder 2y ago
Also casinos typically take rakes in poker
- jack_pp 2y ago
  index funds also take a fee
- treme 2y ago
  Effect of rake makes it such that only about 5% of players show profit in the long run.
Frummy 2y ago
The edge you have from selling insurance is selling psychological safety, people pay to not feel negative. Maybe some gamblers can recognise moments they've been irritated where some rule requires insurance, "let me embrace the risk on my own dammit"
- dartos 2y ago
  The edge they have is providing more utility for you dollar, as OP said. That kind of edge is just having a good or service someone would pay for.

skizm 2y ago

This is the reason I always play the lottery. I won't miss $2 a week or whatever, but I will notice if I win an 8+ figure payout.

dartos 2y ago
Are your odds better than waiting payout/$2 * days buying lotto tickets?
bluecalm 2y ago
2$ per week for a few years is a day off work or a few stake dinners. You could definitely notice it if you wanted.

JumpCrisscross 2y ago

> insurance is a service worth paying for as long as the fee is lower than utility you gain from it Critically, the variable that makes gambling rational is the hedonistic pleasure one derives from it. Insurance versus gambling seems like a penetrating question, but as you describe, it really is not. The more-germane one is gambling versus drinking or theme parks or mindless television.

pfannkuchen 2y ago

Isn’t this typically explained via marginal utility, not just utility? You can’t really compare the utility of the same amount of money in the hands of different people, but for a single person each additional unit of money is worth less than the last along some non-linear curve. The $1k you spend on insurance is further along this curve than the first $1k of the insured loss (and the second, and the third, etc) and if you do the naive expected value calculation it ignores this curve.

mrazomor 2y ago

> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Why even consider the insurance as investment (money increasing tool)? A stock market would get you higher gains at more controlled risk. The 3rd best financial advice I got is about insurances: "Pay the insurance only if the negative outcome would cause you a significant financial loss" (and is of relatively high probability) So, insuring a house from fire etc. makes sense. But, my $2k bike is not worth covering (from my PoV). Or, if we go to extreme, my (unnecessary) motorbike/boat/jet ski as if they are destroyed, I can continue living without them (a bit of exaggerated example, but I hope you get my point). Same for insuring a house from unlikely events.

kgwgk 2y ago
> Why even consider the insurance as investment (money increasing tool)? Most people wouldn't consider it in that way - unless the risk they're insuring is terribly mispriced or they plan to do some insurance fraud.
LorenPechtel 2y ago
Disagree on the probability bit. The important part is the severity of the negative outcome. And if you can't afford to lose the toy you couldn't afford to buy it in the first place. Thus toys should never be insured. (That is, of course, assuming they aren't mispricing it. I've seen a situation like that where I considered it: There are companies that offer small-appliance warranties at approximately an x% of price model--reliability doesn't enter into it. If you know that with your use case the product is likely to fail within the warranty... But some searching shows the real business model is to make it nearly impossible to actually make your claim.)
- dangus 2y ago
  > And if you can't afford to lose the toy you couldn't afford to buy it in the first place. Thus toys should never be insured. You’re getting this wrong. Being unable to afford to lose a toy doesn’t mean you weren’t able to afford it, it means you weren’t able to afford buying it twice. It works the same way with home insurance. I can afford the house. I can’t afford two houses if my current house burns down and I need to buy another one.

ivancho 2y ago

You haven't demonstrated most of these assertions. For example, if everyone gambled against everyone else every second, then that system has a pretty good chance of staying close to equilibrium for a long time, whereas your model indicates that the total utility would be depleted almost immediately. Whereas if everyone was fully insured for absolutely every risk in their life and immediately received a replacement of the exact same value on any loss, then the overall system would just steadily trend to all the money ending at the insurer, which doesn't seem like increased total utility

bluecalm 2y ago
>>You haven't demonstrated most of these assertions. For example, if everyone gambled against everyone else every second, then that system has a pretty good chance of staying close to equilibrium for a long time >>whereas your model indicates that the total utility would be depleted almost i Can you describe specific assumptions about how that "everyone gambling against everyone else" would look like? I just don't see how my model could predict total utility being depleted very quickly while the model having good chance to stay close to equilibrium. My model is very simple: apply utility function on wealth. When you model people flipping coins against each other you will see a lot of busted ones and a lot of rich ones pretty quickly and that will mean significant utility decrease.
- ivancho 2y ago
  Ok, take 100 people, with $100 each, and have one round of $1 coin flips between each 2. A significant number of bets overall, 4950. Each person has wagered 1% of their net worth 99 times, something that we all agree sounds quite scary. And yet there will be no busted people, most will likely be between $80 and $120. Repeat this 10 times, a ridiculous amount of gambling - still most likely no bankruptcies, and the total utility, if we assume log, has barely dropped by 1%. I simply do not believe that we are making such a subtle societal optimization by frowning upon gambling while encouraging all kinds of other risk taking, like investments and properties. And the other scenario where insurance just acts as a drain on the overall system seems to indicate that it is not inherently positive for utility either

EVa5I7bHFq9mnYK 2y ago

Gambling can be a completely rational thing to do. If you are old, poor and tired, your odds to become a millionaire from work are exactly zero. But if you buy a lottery ticket, you buy yourself a week of hope, adrenaline, and a non-zero chance for a life of your dreams.

eddd-ddde 2y ago

That insurance companies are able to make a profit implies that in the aggregate, people lose money on it, just as with gambling.

bluecalm 2y ago
"Food companies are able to make profit implies that in the aggregate, people lose money on it, just as with gambling". The argument is simply incorrect. Insurance companies provide a service, not +EV (money wise) investment. Same as any other service companies - they make profit, the customers benefit.
EasyMark 2y ago
Not losing money so much as making money for a service (insurance). Hopefully it’s reasonable one and not exorbitant for the customer if there’s enough competition in the insurance market