Gambling involves the creation of risk where none previously existed, while insurance is solely about the transfer of risk from one party to another (or more than one).
The risk of losing money gambling to me seems less relevant than the risk of getting addicted to gambling and making irrational decisions. There's a 100% chance that when I buy a BMW that I'll lose money, but of course no one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts.
That said, solving the problem with prohibition creates the normal prohibition problems (rational adult gamblers lose their rights, black markets are setup, etc). I tend to like the self banning programs that many states have set up. If you feel you are addicted, you can sign a form banning yourself from casinos for a period of time / life. If you go back, you can be arrested for trespassing.
And of course, the governments do-gooder motivations seem suspect when the government makes lotteries illegal, but then sets up their own lottery monopoly with absurdly low payout rates.
That's because there are concrete benefits from doing so (going from one place to another). And even with that, there are all sorts of regulations for getting a license to drive a motorcycle, where and how to drive one, what to wear while riding one (a helmet is mandatory in many countries), etc. And even so, if motorcycle related accidents where that many that it would matter, driving one would have been outlawed altogether probably.
>There's a 100% chance that when I buy a BMW that I'll lose money
Yeah, but you also get a BMW. With gambling you on average just get nothing.
In one of them you get a luxury item -- with both use value, status value, and resale value.
In the other you get nothing at all. Not even status.
For some people, luxury cars are a waste of money. Everyone has their own priorities on what is important to spend their money on. Some people like expensive cars and spend their money on it. Some people just want something that won't break down and can get them to work so they can spend their money on whatever hobby they really like.
Gambling certainly gets you status - walk around Vegas and check out the businesspeople playing together. Or for a non-casino version, read about people playing Liar's Poker on Wall Street (in, aptly, Liar's Poker).
And on a smaller scale, it gets you enjoyment. I've had some fun times playing low-minimum blackjack, chatting to other players and the dealer. It got me "nothing at all", but in the same sense that a concert or the markup on drinks at a bar gets you "nothing at all".
It's the money (they can spend) that gives those businesspeople status.
Nobody looked at them and said "they are gamblers, hence they have status".
>And on a smaller scale, it gets you enjoyment.
Heroin too. But nothing lasting and nothing sociably valuable.
I know people who are literally homeless because they'd rather spend their money following bands around. Some of those bands are too niche to be "socially valuable". Does that mean we need to equate music with heroin, too?
The existence of addicts, or the lack of a social movement or physical product, does not determine whether something is worthwhile. Applying your standard would cut out everything up to "going for a walk in the woods", unless by socially valuable you just mean "things I find aesthetic".
In the end, it becomes a problem when it's no longer entertaining (just a game), but rather pathological.
I've certainly seen movies bad enough that I would have happily spent my money playing dollar blackjack instead.
Craps is also a very low (<1%) house edge, and it's a more social and exciting game compared to blackjack (to me atleast)
This is an even better example. I didn't cite it because I couldn't remember the edge on good play, but it's a solidly social experience which can be had for a very reasonable price.
Not necessarily disagreeing, but it raises the specter of double sided moral hazard: what about people who buy houses near flood plains and either don't insure or under insure them because they expect emergency relief government funds to rebuild and thereby recoup their loss at public expense? What about young people for whom health insurance premiums are uncomfortably high, so they instead show up at the emergency room and don't pay? What about parents who do not purchase life insurance and if one dies, the othe goes on public assistance? I realize this may be a US centric issue.
If you drive almost any highway in Germany, you'll see a great number of (goverment-funded) posters against speeding. If you commit enough driving offences, you may need to pass so-called "medical-psychological examination" (MPU - "Medizinisch-Psychologische Untersuchung") which is dubbed "idiocy test". This will cost you time, money and dignity. There are also campaigns agains short-distance driving etc.
So I think what you say is not true, quite many people believe that there is a real and present problem with car addicts that the goverment needs to solve.
buying medicine vs using medicine vs drug abuse
Buy a Harley/BMW, and come to regret it? You can sell it, and claw back at least part of your mistake. (and if you bought it Used in the first place, that sidesteps most of the depreciation argument)
Blow your paycheque gambling? You have no recourse.
Insurance isn't supposed to have big paydays, it's just supposed to make you whole. Your house insurance might pay out a million dollars, but only if that's what it actually costs to rebuild your house.
It's telling that when insurance starts to get away from this model, like people insuring stuff for far more than it's worth, or taking out life insurance policies on strangers, both the law and morality start to frown it.
The loss you're supposed to be covering is your lost income and other less tangible but quantifiable benefits to your family. Although I'm no expert, I'm guessing underwriting becomes more difficult for policies that are completely out-of-line with your income. There has to be some justification for the payout to meet underwriting standards, which in essence is considering the size of the loss. If you're asking for a policy that is very unusual, it will be much more expensive, if you can get one at all.
This matches the historical and in-practice role of the insurer: they try to keep you from overinsuring things, or insuring things you don't have an interest in preventing from happening ("insurable interest"). Both of these create a so-called "moral hazard", the same category that make gambling bad, and vastly increases the fraud they have to deal with.
[1] or rather "the kinds of risk transfer we want to allow" vs those we don't
With that said, given appropriate modifications, your example could legitimately be called insurance. If
- There were a quantifiable decline in prestige from the loss (per sibling comment), and
- the payout were low enough that the insurer thought that you'd still prefer winning to loss+payout, and
- this were a common enough thing
Then yes, it would look a lot more like insurance and merit being regulated like that and less like gambling.
http://www.cnbc.com/2014/03/14/buffett-insures-billion-dolla...
Those challenges are all free, though you could get really deep and argue that consumers are paying incremental value for providing email addresses and marketing leads to the customer.
gambling sometimes provides a huge payout after a small
loss, whereas insurance provides a payout roughly equal
to the loss. Insurance isn't supposed to have big
paydays, it's just supposed to make you whole.
To compare apples-to-apples, gambling sometimes provides a huge payout ("winnings") after a small loss ("bet"), whereas insurance sometimes provides a payout ("winnings") in the event of a loss in return for insurance payments/deductible ("bet").
I place a $5k bet that has a $1M payout. I win, and I'm up $995k. I don't take the bet, and I don't make anything. That's a $995k net ($995k - $0).
I buy a $5k insurance policy against my $1M home. It burns down, and I'm only out $5k (the cost of the policy). I don't buy the policy, it still burns down, and now I'm out $1M. My net is still $995k ([-$5k] - [-$1M]).
The "lose your bet" / "buy insurance but your house doesn't burn down" scenarios are the same either way (-$5k).
By only looking at the net benefit, you're arbitrarily ignoring that. Of course if you ignore the thing that makes them different, they look the same.
If I knick a priceless artifact (e.g. baseball card), the loss is practically nothing, but socio-economically noticeable via devaluation.
"Professional" gamblers treat gambling as trading time (looking for opportunity, like in Poker) versus risk. Bad gamblers (e.g. slot, roulette, etc) play out games where there is no possible benefit from time investment. No consistent reward for trading any commodity.
There's no difference between many kinds of gambling and insurance, other than the regulations and mediums involved. The insurance companies are still managing risk vs reward.
With insurance, only the first two parts can happen. The third part can't happen, because the second part only happens to compensate you for a loss. When gambling, all three can happen. Of course, on average it won't, but it's possible to put in a dollar and get out a million dollars with no losses besides the dollar and a little bit of time.
It is sometimes possible to arrange all three with constructs we call "insurance," like taking out a life insurance policy on someone you don't like, but my argument is that this is where we start to see insurance as "wrong" too.
[0] e.g., someone formally attached to a team in a sport and having a financial interest in their performance also betting against the team as a hedge.
Arguably, that's the entire point of insurance: mitigating the risk of the insured activity so that it is more acceptable as a choice (because unmanaged risk can make an activity less acceptable than average expected net benefit would suggest.)
It's pretty hard to lose your car/house/job to an insurance addiction. Your risk differences are part of an underlying mechanism that results in this outcome.
You could also say that gambling is net negative sum, while insurance is net positive sum. The positive part being the long-term economic benefit of people not having their lives harmed or ended by low-frequency, high-expense events.
When transactions are truly consenting (which is not the case with addicts) and have no negative externalities, sure, we should default to letting people do their thing. But when that's not true, voters, who are the real insurers of last resort for societal risks, end up having to make value judgments.
Really? I had no clue that it was that bad.
Banking might be the "most heavily regulated part of the economy", but the regulations that mattered were also disbanded one by one in the 2 decades leading to the crisis.
The government gave free reign to those "private actors".
Besides government, when it doesn't play its role as being there for all citizens interests, is just a lackey for private interests and powerful lobbies (and, no, "no government" wouldn't be a solution: just more of the problem).
And if I go bankrupt gambling society won't bail me out, I need to get a job.
If you go bankrupt, that is society bailing you out. We cancel your debts and let you go free of them.
We also won't let your family starve, we'll pick up a chunk of your medical coverage, and you'll be consuming all sorts of public goods without paying your share until you're back on your feet. If you ever get there, because gambling addictions that go as far as bankruptcy can be devastating personally.
And consent is not a clear, tangible thing that makes it all OK when its given.
An abused woman might justify her husband, for example, and find all kinds of excuses and say it's OK.
Also, just because someone can consent to something because it's better than the alternative, doesn't mean the deal they are given is OK. Someone on the verge of starvation might be OK with a rotten deal. We might just need to assist them and fix what caused them to starve starvation in the first place, instead of validating the "benefactor" that came up with the deal.
It is probably true for eg. real estate insurances, but there are also quite a lot of extremely overpriced insurances for all kind of products (eg. cellphone) that people certainly can afford to lose, but they are fooled by loss aversion and hyperbolic discounting.
Those who can, not necessarily those who will. It's not as simple an equation as "transfer the risk and you're good".
Isn't the second part of this statement false? How could insurance companies stay in business if their profits are negative? Isn't it a net negative sum for the customer base by design of the actuarial tables?
Basically, we could all do this the same way. Take all the money you pay into insurance and invest it. When you have an incident, take it out. The only downside is if you have an incident larger than what you have invested so far. People also have set up collectives that do this as a group inside of paying others.
both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs. With gambling the payoff is random, but with insurance the payoff is coupled predictably to an external negative event.
I worked in insurance. I am not a fan of it. But you need insurable interest in someone to take out life insurance on them. Otherwise, people would just insure random strangers and then kill them.
This is not hypothetical. One of the forms of insurable interest is key employee life insurance. There have been cases where a business decided to call entry level employees "key employees" so as to take out life insurance, and then these "key employees" kept dying." There have also been historical cases where female serial killers were offing relatives for the insurance money.
When you take in account that personal utility functions aren't linear, insurance and gambling are no longer slightly-negative-expectation, but usually positive.
In other words, if U() is your utility function, U($1M) != 1MU($1). For most people, U($1M) > 1MU($1) and U(-$1M) < 1M*U(-$1).
Is there an example of a voluntary transaction where the expectation is negative?
But then you're not talking about a pure monetary transaction. More like a trade. Which goes back to your point: nobody makes a voluntary transaction where they get less value than they provide.
Take charity donations, for example: people value the warm feeling from helping others and a clear consciousness more than the money they are giving.
You have to get through a few steps to agree though! You could disagree by saying that people's "revealed preferences" are their "actual preferences", or by saying that people's utility function after accounting for hyperbolic discounting is their "actual utility function."
Diminishing marginal utility implies that you gain more utility by acquiring your first penny than you do acquiring your hundredth. Now, at such small levels of money, you could certainly argue that almost nothing is for sale at 1 penny, but once you get above the level where the disutility of carrying around a coin is dwarfed by the utility of the money itself, diminishing marginal utility applies pretty well.
Losing $10k when you have $20k hurts less than losing $10k when you have $10k.
There are even some techniques to discover and plot your own utility curve, which is quite useful when you're handling things like investing and insurance.
For example:
* Would you give $1 for a 10% chance of receiving $10?
* Would you give $1 for a 9% chance of receiving $10?
* Would you give $10,000 for a 1% chance of receiving $1M?
* Would you give $10,000 for a 0.9% chance of receiving $1M?
* Would you receive $10 for a 1% chance of losing $1000?
* Would you receive $10,000 for a 1% chance of losing $1M?
* Would you rather do nothing or have a 50%/50% chance of winning $1000 and losing $1000?
* Would you rather do nothing or have a 50%/50% chance of winning $1M and losing $1M?
* Would you give $1 for a 1% chance of winning $100?
* Would you give $1 for a 1.1% chance of winning $100?
* Would you give $1 for a 1.2% chance of winning $100?
.
.
.
* Would you give $1 for a 10% chance of winning $100?
Insurance is defensive while gambling is offensive.
A more concrete way of stating this is: the purpose of gambling is to try to earn an outsized return, while the purpose of insurance is to make you whole in case of loss.
Granted, gambling does give you betting markets which may help predict the future as well. But I would guess for broader topics only. Perhaps someone could enlighten me otherwise.
Pooling risks makes things more predictable (not sure what's the avg. profit of insurance companies)
A small correction, it's: "its own question"
It varies by company and type of insurance but profit margin seems to be in 5% range or so.
The risk of each client is not transferred, but eliminated.
Also, arguing by definition is pointless, put since we're already debating pointless semantics, google 'risk transfer' and see what comes up.
A gambler, on the other hand, is indifferent to the outcome of the roulette wheel except for the monetary payout. Same goes for buying options unless there is ownership of the underlying security.
A gambler had an incentive to cheat to make the transaction go their way. An insurer has an incentive to help make the event the insured does not want to happen not happen.