6 ms·

It should be noted that used in Thinking Fast and Slow context this micromort induce can be used to show how much we human have very hard time grasping low prob

• eli 13y ago
  I gladly pay my life insurance premium because I want to know my loved ones will be taken care of. It's not a scam. I fully intend to pay in more than I get out of it (I hope!!). Lottery isn't really a scam either if you derive pleasure simply from playing the game.
  • gbog 13y ago
    Yes but a fair insurance would be the exact price of the risk leveled among insured, plus a small processing fee. There should be not one penny left for luxurious offices or prestigious ads or art mecenat. Lottery pleasure is empty. Play poker with friends, you may loose money but at least you get friends. The problem pointed in Kahneman book is that we are irrational, and (AND) it's usually the less irrational among us who win.
    • shock-value 13y ago
      > plus a small processing fee Okay, but small is relative. For example, an insurance company has to pay for investigators, the number of which would likely scale linearly with customers. Nice offices and an advertising presence are also likely necessary to entice and maintain customers, probably more-so an an industry like insurance in which there aren't many tangible differentiators between competitors (see Coke vs Pepsi). I don't see why insurance should be any different than any other industry regarding these issues and also the existence and legitimacy of profits (assuming they weren't derived from fraud).
      • gbog 13y ago
        It is different in this that you can't evaluate the price of the thing you buy. It's like contemporary art if you will, but art is more obviously a scam, while insurance have an aura of solidity and serious.
        • deleted 13y ago
          [deleted]
    • nazgulnarsil 13y ago
      Humans are not homo economicus.
      • gbog 13y ago
        Sure and that's why they are easy to beat. How many industries would not even exist if human were rational? And again, the most rational ones have less loss aversion, take more pondered risks, invest in what has real value (education) and usually win the game in the end.
    • olalonde 13y ago
      "fair insurance", "There should be not one penny left ", "Lottery pleasure is empty"... You are stating a lot of opinions but not many facts. Also, why isn't it "fair" for insurance companies to turn a profit while it's fine for other types of businesses?
      • gbog 13y ago
        You can have a look in a book titled Thinking Fast and Slow. It is strongly backed by multiple experiences. Profit: it is ok to make profit, but where ifs the limit? Would you agree that companies should not take advantage of children weaknesses to force sell them useless thing (a lot do)? Or mentally deficient ones? I wouldn't, because somehow we are not in a jungle. And the point is that humans are not grown ups in front of rare events. Everyone fears an earthquake during the week following an earthquake, and completely forget about it the next month. Moreover the fact that insurance are highly regulated just makes my point. We are defenseless and the law puts some limits because a scam is too easy to build.
    • eli 13y ago
      Insurance is about managing risk. I willingly and happily pay extra money spread over many small payments to eliminate the risk of a single rare event (e.g. A car accident that's my fault) from totally ruining my life.
      • gbog 13y ago
        The car accident is different, insurance is mandatory because you also risk other people's lives. And I don't say you shouldn't pay for your own protection, I say you can't evaluate the risk correctly and are very likely to be ready to pay too much. Which is how insurance make money.
• batiudrami 13y ago
  Insurance isn't a scam. You pay a little extra to ensure that you can get the money before you would have saved it (assuming you put your entire ensurance premium into savings) in the event that you (or your family, in the case of life insurance) need it. Sure, in infinite (or sufficiently high) number of lives/events, you'll always end up behind, but that doesn't mean it's a scam.
  • gbog 13y ago
    Do you agree that we are very bad at evaluating very low probabilities (below .1%)? Then how much would you bet on the hope that insurance companies are not taking advantage of this psychological weakness for their benefit?
    • batiudrami 13y ago
      I agree with both your points there, but disagree with the premise that insurance is a scam - the insurance companies provide a valuable service, and they charge what people will pay - the way any reasonable business is going to behave. From there, it's up to you to determine whether it's worth it. I personally don't have health insurance (though I live in a country with universal healthcare), but I have 3rd-party car insurance in case I accidentally drive into someone's Lamborghini, and it was fortunate that my girlfriend's dad had life insurance so that her mum had some money after he passed away prematurely last year. Just because money is being made doesn't mean it's a scam.
      • aaron695 13y ago
        But why are you worried about driving into a Lamborghini and not the fact it would mean you've had a car accident and you could be dead? This to me is where our perceived realities differ with real life. Spending the money on defensive driving and/or car safety makes much more sense, but we can only see the future where the accident happens (And we survive) not all the accidents we can stop. I have no idea about your girlfriends father and what happened but I'd prefer to spent money on not dieing than paying for what happens if I do.
• whatshisface 13y ago
  Insurance is not intended to pay out more money than you put in, it is intended to prevent gambler's ruin. Some extra money when you are in trouble is worth more than the money itself, it is also worth the trouble it gets you out of.
  • nazgulnarsil 13y ago
    Or put another way: In your life you are optimizing over more than just money. Insurance is a way to reduce variance, and thus stress, and is therefore worth a nominal fee.
    • Houshalter 13y ago
      Another reason is what I believe economists call it "the law of decreasing marginal utility". Every extra dollar you have is (usually) worth less and less, since you pay for the things you want/need the most first, and money is only worth what you buy with it. Your expected utility is not your expected dollars. The average person will pay more into insurance than they get out of it. However it's worth it for the small chance that disaster could strike and you could lose everything. Better to sacrifice a small amount of utility to prevent losing a large amount from becoming homeless.
      • gbog 13y ago
        My point is not that insurance in itself is a scam. It would be rational to pay a small fee to a common account and get back much more when needed. It is how most communities work. My point is that the current insurance system and price is a scam, because it is much too expensive and covers to many silly cases. That's because it is very hard for human beings to evaluate the risk of something rare and its price. While this evaluation is exactly the job of insurance companies. It is the classic situation for a scam: the buyer can't know the real price. And we also have the symptoms: way too much money is spent on luxury in this industry, they have the most expensive tv ads, etc.
        • Houshalter 13y ago
• aaron695 13y ago
  Agreed, and the fact people here think insurance is not a scam is actually proving your point how they can't measure risks well even when pointed out to them. If you house burns down, sure that's reasonably catastrophically bad, But if you house burns down, there's a fair chance it'll happen at night, and there's is a fair chance you'll die. Don't spend money on insurance, spend it on stopping your house burning down. If there's a risk of it happening then the money should be spent on reducing that risk, not wasting it on, if I survive at least I won't be poor.
  • pgeorgi 13y ago
    > Don't spend money on insurance, spend it on stopping your house burning down. Or do both (it's funny how IT types love those dichtomies). And if you tell your insurance about your extra measures for fire safety, they likely lower your rates. They might even consult you about which fire safety measures are actually useful (and they have the data: data driven fire safety, how does that sound?). Since fire insurance tends to pay for damage repair when things didn't burn to the ground, they're also useful in situations that are not as life threatening as your example. We had a warehouse burn down in town, and the neighboring house was affected in that the windows on two sides of the house melted enough to be useless. The cost of replacing all those windows can easily exceed an individual's short-term liquidity (a single event might even exceed the rates paid for the insurance over its life-time) - for the insurance that was pocket change.
  • csomar 13y ago
    I can't understand your logic. 1. Securing the house from fire costs $5,000/year to reduce the probability of the house catching fire (it's still possible that it catches fire). 2. Buying an insurance which costs $500/year and will replace your home in the event that it catches fire. 2 is cheaper, and a better deal if your house catches fire. With 2 you are even more secure.
• cdjk 13y ago
  Lottery - sure, that's a scam, barring the odd situation where a positive expected value is possible. Insurance on small events (i.e. the extended warranty from Best Buy) could be described as a scam, but homeowners insurance/car insurance isn't. The whole reason insurance exists is because of differences in risk tolerance. What is a huge risk for me, such as a fire destroying my house, is a relatively small risk for an insurance company that is insuring against fires across the entire state. What I pay the insurance company for is to assume part of that risk. Consider homeowners insurance, and more specifically fire insurance, in this admittedly contrived example. Suppose that in the next year there's a 1/1000 chance of a fire that will cause damage that will cost $100k to repair. That has an expected value of $100. Well, since $100k is a lot of money to me, I'd rather pay someone $200 than take a bet with an expected cost of $100, even though paying $200 has a negative expected value. That means I am risk averse for potential gains and losses on the order of $100k, and would rather take the more certain side of a bet, even if it means it has a lower expected value. Take another example. Suppose I'm worried about losing or breaking my cell phone over the next year, and it would cost $500 to replace. AT&T charges $6.99/month for insurance on the phone. Over the course of a year that's about $84. And furthermore suppose there's a 1/20 chance that I'll lose/break/etc my phone during that year. Without insurance, the expected value of the loss is $25. Unlike the $100k example, $500 isn't that big a deal to me, so the insurance is a horrible deal for me, because I'm risk neutral for a $500 loss. Of course, real life is more complicated. Homeowner's insurance protects against risks other than fire. Risks to the insurance company can be correlated - something on the order of the 1906 SF fire is a large risk, even to an insurance company, which is why there is reinsurance. There are deductibles that change the pricing. But still, as a simple example, that's how insurance works.
  • gbog 13y ago
    Yes, you describe exactly what is in Thinking Fast and Slow. So you are not rational, neither am I. But as you repeat the same patterns of risk aversion for all occurrences of a choice in your life, the sum is that you paid too much for insurance. A rational agent would pay 100$ plus the processing fee for the home insurance. It would not pay for "piece of mind", just as it would not pay for the "excitement" of a lottery ticket. We are not rational agent, but my point is that those who are closer to rational choice based on statistical truth are the one who win the game (in average).