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Why we keep paying for insurance, when the expected value is negative ? To reduce the variance of the money we lose. With lottery is the same, I pay to increas
by pelario 12y ago
Why we keep paying for insurance, when the expected value is negative ? To reduce the variance of the money we lose.
With lottery is the same, I pay to increase the variance of the money we win.
- cpwright 12y agoHowever, with many forms of insurance the expected value is very nearly 1. Term life, for example, pays out 90%+ of premiums as death benefits. You are unlikely to get any of that money, as most policies do not pay out; but the low probability of a payout multiplied by a comparably high death benefit results in E(X) not to far from 1. Another reason we keep paying for insurance even with bad expected values (e.g., title insurance) is because we have no choice about the matter. If I want a mortgage, I need title insurance, even though only a small fraction of the premiums are actually paid out as claims.