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Comment by mikeash | Hacker News Reader

I'd say the fundamental difference is that 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. 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.

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I think I would refine that a bit as, insurance [1] involves payout on an event the insured doesn't want to happen [even given the payout], while a gamble is where the insured does want it to happen [because of the payout].

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

That's easy to get around. I don't want Duke to win the NCAA Tournament. I will pay you $X to insure against that happening, but if it does, my insurance policy kicks in to the tune of $Y.

Imagining the competing school insuring themselves against the loss in prestige/recruiting that would come from that loss

You mean easy to get around if that's what the law actually said? Sure, the distinguisher I gave doesn't easily translate into cheaply applicable test that law enforcement can use; it's more for identifying categories of activities that look more like gambling vs insurance so that lawmakers can identify which are worth banning. It's hard to externally identify that on individual cases.

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.

Here's an interesting and topical example: the "billion dollar bracket" challenges you're seeing right now with the NCAA Tournament are all insured. The company offering the "prize" isn't going to be out $1B if someone hits a perfect bracket; they've got insurance to cover the event that someone wins. (The cost of that insurance is rumored to be around $10M.)

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.

By the way, this example is really fun because you can re-word it to: "I'll bet you $1B at 100:1 odds that no one will get a perfect bracket."

The fundamental difference is that gambling is an added risk (generally, and the exceptions are often illegal even where gambling is legal otherwise [0]), where insurance is a hedge against an existing risk; both decrease your expected financial return, but gambling also increases risk while insurance decreases it.

[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.

Insurance can also make existing risks more acceptable and thus lead to more risky behaviour. E.g. if someone has 0$ co-pay/deductible for car crashes they might not drive as carefully because who cares, it won't cost me anything right? (well until they jack up premiums). So crafting insurance policies and rates takes a lot of care, but the profit motive is a strong driver here.

> Insurance can also make existing risks more acceptable and thus lead to more risky behaviour.

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.)

Life insurance can have huge paydays. The size of the payout is tied only to the premiums paid, not to the size of the loss.

Yeah, but somebody needs to die in order to collect it. Again, the goal is to make a party whole after a loss.

But the premiums are tied to the size of the loss, which is what the payout is supposed to cover.

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.

  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.

Not at all! You're conflating "loss" with "payout" in your insurance example. My homeowners insurance might pay me a million dollars ("payout"), but I only pay $5k/yr ("loss") for the policy.

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").

The "loss" has to include the destruction of your home in addition to the cost of the insurance.

Correct, but the NET benefit is the same.

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).

I'm arguing that the fundamental difference between gambling and insurance is the presence of a large loss that's necessarily linked to the large gain.

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.

Large is a nonspecific value, as is the valuation of the loss. Is the $1000 life insurance policy large? The limit is practically somewhere around the lifetime administrative costs or we would see even smaller (like you do in non US countries). I don't know the smallest insurance limit in rupees, but it's tiny.

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.

The difference is whether or not this scenario can happen: you put in some money, get out much more than you put in, and end up far better off than you were before.

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.

I'm playing the heel here. Your point is well-taken, in that insurance prevents large absolute loss rather than the potential for large absolute gain.

I don't think public opinion is formed on how payouts are based, but on a more general view of social harm.

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.

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