What makes gambling wrong but insurance right? (2017) | Hacker News Reader

What makes gambling wrong but insurance right? (2017)

bbc.com

179 pointsrzk313 comments

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.

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

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.

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.

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/

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.

Ive never seen a definition of utility which wasn't self referencing.

It's a highly unscientific concept.

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)

>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.

It's not like that at all. If you want to argue that one can't define value then I am out. If you admit "value" has well understood meaning then utility function of wealth is just how much value one can derive from it. We usually measure wealth in money for convenience. I really don't know why you are so against it. There might be a lot of nonsense associate with it but the concept itself is pretty simple and useful.

> never seen a definition of utility which wasn't self referencing

It’s analogous to “holes” in semiconductors or virtual particles. You can’t directly observe it. But it’s an intuitive notion that makes many calculations easier.

Critically, there are several valid definitions of utility, e.g. the von Neumann–Morgenstern (VNM) utility theorem [1] and revealed preference [2]. Each has its own axioms, defined with varying rigour, that can be theoretically extended and practically applied.

> a highly unscientific concept

Sure, it’s unscientific in the way mathematics are unscientific: it starts with a set of axioms and extends from that. Determining whether the chosen axioms fit a particular situation is a separate, more scientific question.

That said, similar criticisms have been raised about e.g. auction theory and quantum physics, both of which (like utility-based models) make testable predictions.

[1] https://en.m.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenst...

[2] https://en.m.wikipedia.org/wiki/Revealed_preference

"Utility" isnt axiomatic or analogous to holes. It's "vibes" dressed up in sciency sounding language.

https://en.wikipedia.org/wiki/Utility_representation_theorem

"In economics, a utility representation theorem asserts that, under certain conditions, a preference ordering can be represented by a real-valued utility function, such that option A is preferred to option B if and only if the utility of A is larger than that of B."

You may challenge the assumptions but otherwise it's mathematics.

What’s your opinion of game theory?

> It's "vibes" dressed up in sciency sounding language

This is pop economics. (And again, as mentioned, it’s not science-y. It’s applied mathematics. It’s only when you use the model to make predictions that it becomes science-y.)

Of course, if you’ve refuted von Neumann and Morgenstern, by all means, publish. Otherwise this is the “series of tubes” equivalent for economics.

Except that having multiple valid definitions of something that is foundational to a discipline is a bit unsettling.

> having multiple valid definitions of something that is foundational to a discipline

It’s foundational to one branch. Almost all of finance, for instance, doesn’t bother with utility functions.

One can similarly complain that mathematicians have different rules for parallel lines depending on geometry. Like, sure. But if you’re in the field it makes perfect sense why parallel lines don’t intersect in a Euclidean space but do in a curved one. Given utility functions are literally ordered sets of preferences, it strikes me as trivial that there would be a multitude of them. (If this bothers you, don’t look up Gödel.)

The economists who deal with utility functions are more or less applied game theoreticians. Some people have a problem with game theory and statistics because they’re unpure. Like, sure. Fine. I also have a small stable of useless opinions, e.g. raisins are trash fruit. That doesn’t mean raisins are themselves useless; it’s just my opinion that’s adding zero value in a world where raisins do.

> Almost all of finance, for instance, doesn’t bother with utility functions.

You need the concept of utility and some (reasonable) assumptions about the shape of the utility curve to derive CAPM - at least the way I was taught it and there may be an alternative I do not know of?

I do not think there being a multitude of utility curves is a problem. It seems to be there is a lack of a clear concept.

I do not think that your analogy with maths works. Maths is is more abstract and should change with different sets of axioms. Economics is supposed to be based on observations of the real world.

Number of dopamine molecules secreted by a person during his lifetime?

>>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/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.

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.

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).

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.

I don't know why you said "the other way", cause this is the exact thing I decribed in my previous comment.

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.

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.

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.

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.

Variance can be good though. Imagine you want some expensive service like a waterline for your house that's difficult to steal but you live under rules of gangsters or oppressive government so holding anything more than a little money at a time is risky.

You gamble every paycheck knowing eventually you will get a big payout. You quickly pay for the waterline and now you don't have to walk 300 ft to the well everyday.

That's a very contrived scenario and your hypothetical response is very unrealistic. For one thing, the gangsters either wait outside the gambling joint or simply take it outright and farm the rake. For another, real communities with such dynamics don't accumulate cash, they might accumulate tangible goods or a little infrastructure but they are not going to have large sums of cash-equivalents lying around. For all kinds of reasons you need either a high-trust society or an army to accumulate liquid wealth.

Informal gambling between low tier non gangster class people outside a joint is common amongst the lower class most everywhere and the whole scenario was about minimizing liquid wealth and dealing with cash intensive problems in places where cash is risky.

In the Philippines they even have a pooling system 'paluwagan' like this to make it possible for people to buy big things without a bank account or having to store large sums for large period of time which can be risky there.

Thanks for the example.

Maybe but when you see seemingly irrational behavior by "the underclass" it's always worth spending a little more time trying to understand what kinds of issues they may be facing that you're not intuitively aware of.

If you've been in the position where every dollar you make gets somehow taken from you without warning for years you'd act differently. Goes from things like avoiding banks due to various fees or garnishments, up to practices of wearing expensive jewelry because it's a fairly efficient way to carry value on your person, and because you often get to keep it even when you get arrested, unlike the cash in your pocket.

Another example could be needing money for life saving expensive treatment for either yourself or a loved one.

That's why I mentioned that "avoiding variance" in itself is not a good argument. You avoid it for a reason and that reason is that (u(x - a) + (u + a)) / 2 < u(x) for vast majority of life scenarios.

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

> 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.

>>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.

Insurance is not always a for profit enterprise. There are very many “mutuals” who are literally owned by their policy holders.

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).

Yes people can come together at their home and gamble as well

It is just the same can’t find any logical argument that makes it different in any post. Feels like everyone is trying to justify it

> It's true that the buyer has negative expected value money wise and the seller positive one...

This is obviously the insurer's goal, but in practice competition and relaxing underwriting standards to win business means that many insurance companies do not turn an underwriting profit (the buyer winds up with a positive expected value). But premiums are paid up front and payouts to policy holders do not occur until later, and the insurer can invest the "float" in the meantime, so they still make money.

Obviously the customer could have taken the premiums and invested them themselves, but that also takes time and effort, and may come with risk itself. It is not obvious that insurance is a bad deal even ignoring arguments about the concave nature of the utility of money.

> 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.

Also casinos typically take rakes in poker

index funds also take a fee

Effect of rake makes it such that only about 5% of players show profit in the long run.

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"

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.

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.

Are your odds better than waiting payout/$2 * days buying lotto tickets?

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.

> 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.

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.

> 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.

> 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.

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.)

> 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.

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

>>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.

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

It's unlikely anyone's busted but utility is unquestionably lowered. A negative for society. Insurance increases equality, gambling lowers it.

This is a bit of a stretch from what I said - 1% drop after the entire population has gambled through 10x their net worth is not meaningful. I also pointed out other speculative activities which we encourage, presumably because they compensate by growing the economy. Insurance might preserve or increase equality, but it also might extract so much rent that the overall utility is lower. There is simply no cut and dry explanation - for some parameter choices things work the way you say, and for some they don't

I think you are simply wrong about your assumptions. If the system is semi-stable the total utility won't decrease that much. If it's not stable it will. I am not sure exactly what you are missing there but maybe that it's expected utility going down, not utility going down with every outcome. For example if people with 80 and 120 net worth flip a coin for 20 it might be go up or it might go down but u(60) + u(140) < 2x u(100). Maybe that's why you utility model predicts the total utility collapsing quickly while in fact it predicts slow utility decrease (if the whole setup is close to being stable).

My model was not to demonstrate that utility doesn't go down ever, it was to show that it can do that extremely slowly, which makes the utility argument about why we discourage it societally a bit weak - we're clearly not very good at discouraging any other behaviors resulting in long-term bad outcomes (for society or the planet), and we reward all sorts of risk-taking.

I think the simpler explanation is that gambling is seen as addictive and destructive on an individual level, and there is no need for total utility to explain why that's undesirable

well you can hedge your bets, a form of insurance. people do this with stock too.

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.

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

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

"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.

Fundamentally both "gambling" and "insurance" are about trading a stream of small guaranteed payments for a chance at receiving a large payment. More generally, it's about trading risk. In insurance the risk is transferred to the insurance company; in gambling the risk is trasnferred to the gambler.

They're precisely the same transaction, just packaged in different ways, and with tons of overlap. What differs is the participants.

Individuals don't tend to want or need a lot of risk, so a transaction where risk is transferred from an individual to a large company (like an insurance company) is generally good, and one where risk is transferred from a large company (like a casino) to an individual is generally bad.

With life, home, auto insurance you already bought in on one side of the outcome (life, property value) - you are trying to minimize your loss.

With a football match you are not staked to either side - gambling event happen everyday around you and have no effect on you.

Easy. You can insure only insurable interest. Your house can catch fire at some point in the next 20 years, and Dallas can beat Boston the NBA finals. Both outcomes are unknown now, and therefore probabilistic events. If you buy fire insurance on your house you can try to rephrase that you placed a "bet" that your house will catch fire. But it's a stretch. If you bet on Dallas, how do you spin it to say it's insurance? Can you claim that you are a Boston fan and you insure against the emotional hurt if Boston loses?

I have to challenge the premise here. I don't hear people saying gambling is wrong and insurance is right. My guess is most people consider gambling a harmless vice most of the time, and consider insurance an annoying fact of life.

Now, people consider problem gambling a problem, but that's a tautology. Many people also think casinos are predatory, but wait 'til you hear what they think about insurance companies.

The reality is insurance is a product regulated by the government and gambling is a product often outlawed entirely by governments.

The difference is that gambling increases the overall variance of outcomes to an individual whereas insurance decreases it. I wouldn't say insurance is a form of gambling but that they are two ends of the same spectrum. The difference in intention is a clear distinction to me.

Insurance can benefit the insured and insurer according to Kelly’s criterion depending on respective wealth and risk probability. Have a look at this blog for intuitive examples where insurance is beneficial for both the insurer and insured.

https://two-wrongs.com/the-misunderstood-kelly-criterion.htm...

The thing that makes or breaks the Kelly criterion is the correct evaluation of risk. If the risk is incorrect then it is garbage-in garbage-out. Due to this uncertainty, people tend to use fractional Kelly criterion.

For a car example, my current car price is a significant proportion of my total wealth and the risk of totalling it is perceived by me to be high, so I pay insurance. I say perceived because in 15 years of driving I never totalled a car.

But now that I understand the Kelly criterion I will account for how expensive it is proportionately to my wealth and figure the cutoff price where I need to get total coverage insurance and how much it costs. It also explains by cell phone insurance and similar are normally not a good deal, the insured asset is worth a small proportion of my wealth.

It's not about Kelly Criterion specifically but about utility of money in general. Kelly Criterion just solves for maximal utility assuming utility is logarithmic (big assumption often made for convenience).

The logarithmic part comes from the view point of wealth as a geometric progression. I am not an expert, can you point me to a case where it is not logarithmic?

This Question was the part of the Plot of Terry Pratchett's "Colors of Magic". The insurance there is explained like a bet that the tavern doesn't burn down. As a result, the tavern catches fire and causes the great city fire of Ankh-Morpork.

https://www.youtube.com/watch?v=BqxABYAKlCI#t=33m17s

Life is the gamble. Insurance is a hedge. That’s not complicated. Mandating that people purchase health insurance is a complication in the sense that a person is forced to use their resources to hedge or pay penalties, instead of going all in on life. In the US it’s mostly a low-middle class problem because the cost of health insurance affects their financial flexibility. It’s not a great expense to the middle-upper class and the poor usually qualify for government healthcare.

Betting is taking on some defined risk with probability of payoff.

Insurance is offloading part of the risk to the third-party (Insurance underwriter).

For example I can bet on the roulette on the Black. I can also insure(hedge) against Zero by paying insurance premium (1/37 of my bet on Black).

that way I bet on Black and have 1:1 odds, and in case of Zero my insurance will pay out 37:1 completely paying back my bet on Black.

of course 1/37's of my bet will be gone most of the time and this is exactly the house edge in roulette.

in real-life you probably don't want to bet most of the times, but in some obscure low probability scenarios - you would want to offload that low probability event to insurance.

main difference is you expect insurance to pay out rarely, but in betting you expect to payout more regularly.

Gambling is played through "games of chance." Which is all you're betting against.

Insurance is priced through "underwriting." Which measures the value of the underlying economic activity or instrument within the fair market and puts a contract price on it's guarantee for a limited period of time and specific purpose.

There's also broader forms of historical "insurance" such as the maritime law of "General Average." Which further highlights the differences between the nature of insurance versus the nature of gambling.

Insurance spreads unavoidable risks to a larger group so that the brunt can be more easily borne. Gambling creates new risks.

agree, this is definitely describing something that is little talked about but very central to economics.

there is a book by the Gangs of New York author called Sucker's Progress: An Informal History of Gambling in America (1938). The relation between insurance and gambling used to be even more blurry. Even the terminology. The word "Policy" for example. https://en.wikipedia.org/wiki/Numbers_game

Even the mathematical foundations of insurance (probability) derived from the study of gambling. The famous Bayesian statistics are described by Bayes based on the concept of pebbles coming out of a bag.

i feel that we do not discuss economics / gambling / insurance in detail because it is emotionally difficult.

"well but the house always wins in gambling"

and in insurance? how often does the house lose?

> how often does the house lose?

Not often, but it does. See AIG

AIG got bailed out by the government and is still in business.

The shareholders still lost.

> and in insurance? how often does the house lose?

That’s why the house has actuaries and analysts to tell them that their bets in Florida are too highly correlated to each other, and they have risk of bankruptcy. So they leave the state. Similarly, I imagine we’ll see tests of insurance companies’ risk analysis when California has a significant earthquake.

There's another factor that sometimes is in play here: tax treatment.

I used to take my employer's dental coverage. I considered the expected value to be "negative" and could easily self-insure. Yet it was a good deal anyway: I could pay the insurance cost with pre-tax dollars, but if I paid out of pocket it was with after-tax dollars.

This is also why you periodically see news things about *big* employers taking out insurance on all of their employees. No, it's not an indication they are being unsafe, but taxes. The proceeds from life insurance are tax free. The insurance company invests the money, when it's paid out that's not taxable. Done on a big enough scale the overhead costs are less than the benefit of converting taxable gains into tax free gains.

> There's another factor that sometimes is in play here: tax treatment.

Indeed. I wish I could "insure" my car's maintenance using pre-tax money.

I've always thought that ethically "right" forms of insurance (and other financial products, like equities, futures, etc.) is that they should enable individuals to take actions that are riskier than they would normally be able to, without unduly increasing the aggregate risk of the entire system. Of course, this is 1. Hard to measure and 2. Hard to define "unduly". For example, I believe mortgages are a "good" financial instrument, because they enable people to have homes and roofs over their head without introducing systemic risk... except when done in 2008. The devil is in the details and the implementation, I suppose.

> I've always thought that ethically "right" forms of insurance (and other financial products, like equities, futures, etc.) is that they should enable individuals to take actions that are riskier than they would normally be able to, without unduly increasing the aggregate risk of the entire system.

What are some examples of an "ethically right" insurance product?

One example that the article gave is how Ghanan farmers couldn't risk to expand or specialize their crops because of the risk of drought. That feels like a need that could viably be met with sensible insurance.

One form of insurance I've always been a fan of in the US, at least, is mandatory car insurance. Considering that the cost of a collision can be extraordinarily high for all parties involved, but because most people don't crash, amortizing that risk out among drivers enables more people to get vehicles and transportation without freak accidents putting people into financial distress.

Or simply building fire insurance, so you’re not massively in the hole with no collateral if your house burns down. Which is why lenders require a house to at least be fire insured in my market, as a condition of the mortgage.

The mandatory insurance is for your liability if you damage other people’s property. (If you have financed the car, you likely also have to insure your own car against collision and other damages, but that’s a condition of the financing, not a law.)

We were hit from behind in a car that we did not carry collision insurance on. The at-fault driver is responsible for the repairs and they have mandated insurance to cover that.

Insurance maximizes the productive capacity of the economy by allowing the entire class of actors to absorb the net cost of a peril while all continuing their productive endeavors enhancing the health and wealth of society.

Gambling allows one class of actors with better planning, impulse control, and knowledge to siphon off the productive capacity of society usually while producing nothing of value.

What's more it is usually by virtue of its other attributes and position in society the sector is often directly involved in other illicit activities or at least crime adjacent creating an opportunity to defund or deter crime by attacking this sector.

Something not mentioned in the article is that both gambling and insurance can be regulated, or unregulated industries.

Most familiar forms of mainstream insurance (car, home, health, etc) are actually regulated financial services. Likewise, legal casinos in most states of the US. The quality and transparency of the service depends a lot on the quality and enforcement of regulation.

It does seem to me that insurance involves "collateral" in the sense that you insure things that actually exist. This would seem to place a limit on what people are willing to pay for insurance.

I think the main difference is:

In gambling, you want the payout. In insurance, you probably don’t. Why? Because you don’t want that bad thing to trigger it (illness, property damage, death).

A smart gambler might not care about the payout. For instance, if I have a business that partially depends on election of a candidate I may bet against them winning so i recoup my investment if they lose.

That’s using gambling to hedge your business position, not insuring your business against the potential loss. The bet is only tangentially related your business. If your candidate wins but the revenue you thought you’d get doesn’t materialise, you’d probably wish you’d won your bet instead.

Fun fact: in the US, you can actually buy an insurance against a specific event that had already happened when you took the insurance (the term to google is “title insurance”)

It would be good to clarify that it is a generally unknown issue or an unknown event that might have happened in the past, but discovery of this still happens in the future.

I recall Robert Heinlein poking at this question in his book "The Moon is a Harsh Mistress"; the inhabitants of its hardscrabble lunar mining colony have no health insurance system, but they certainly do have bookies, so they place bets against their own ill-health as a means of covering medical costs.

Insurance is just a form of investment. It seems to me that the primary difference between gambling and investment is that the utility of gambling (the expected return over time) is negative, and the utility of investment is positive. And that's it.

In a casino, the gambler is gambling, while the casino is investing.

insurance is negative EV, like gambling, for the individual.

Actually, insurance is very often positive expected value for the individual. He's paying the insurance company $n, which the company reinvests for even higher expected value, which is how the company makes a profit even when it's paying out to its customers slightly more than they put in. It's essentially the bank model.

I suppose that even when insurance is negative, its primary function is to buy protection against being shunted to $0 value. You're paying value to eliminate risk.

you're just renaming things here. the expected real (as opposed to nominal) value is still zero or negative. people don't run insurers out of the kindness of their hearts.

They compete with other insurance companies for customers. And the way to do that is to minimize the cost of insurance for a given payout. Which can push the expected value to go positive.

If a bank can pay you positive value (in the form of interest), an insurance company can as well.

> the utility of gambling (the expected return over time) is negative, and the utility of investment is positive.

No, actually, if you include non-monetary benefits, both expected utilities (gambling and insurance) are positive (at least if the gambler is rational and only bets amounts that are more than compensated for by the entertainment value involved), but if you don't, if you only consider monetary costs and benefits, both expected utilities (gambling and insurance) are negative. So insurance is not an investment in the financial sense, where the expected monetary utility alone is supposed to be positive.

Funnily enough, insurance in Blackjack is the real scam. The edge is against the player in all hands except two cases, in which you would just lose less if you buy it.

The example of financial derivatives is really strong: on the market it's basically a form of gambling. Will this thing go up and down? Noone knows, but you're a genius if it works and a loser if not. But if you own something and hedge by e.g. getting puts it's a form of insurance.

So the instrument is the same, it's the intent that makes it different.

Before we delve into everything else...

> Risk-sharing mutual aid societies are now among the largest and best-funded organisations on the planet - we call them "governments".

I'm not aware of any mutual aid society that shot an unarmed man SEVEN TIMES IN THE HEAD because they misidentified him. The Metropolitan Police did, and none of the officers were disciplined.

https://en.wikipedia.org/wiki/Shooting_of_Jean_Charles_de_Me...

That right there is a great example of the bias of the BBC.

----

The article is engaging but doesn't give a good explanation of the difference between "insurance" and "gambling".

At the very end it brings up financial derivatives but again does not explain them well or the danger they caused.

Is "insurance" a type of "gambling"? Maybe. But it's quite different from gambling in a US casino (and I presume UK casino).

In the US, "gambling" refers to wagers placed at known odds, sometimes against other players; legal gambling has limitations on how much money the House can take: e.g. if a casino "wins" $100, they must also pay $80 to someone.

Again in the US, "insurance" (excepting health "insurance", which is mostly not insurance) is someone paying a regular premium and the insurer promising to pay if certain events happening to the person, with the government requiring that the insurer keep financial reserves to pay out claims. If you stop paying your premiums, you lose your insurance. If the insured events never happen, the insurer keeps your money.

In a sense, insurance is a type of gambling, but closer to buying an umbrella in the morning in case it rains in the afternoon.

Financial derivatives were portrayed as insurance but were not regulated as such, and the banks did not keep reserves to pay them out; because folks were also taking "insurance" against events that happened to third-parties (i.e. not themselves) it looks a lot like gambling (though they weren't regulated as that, either).

I highly recommend the film "The Big Short" to explain the 2008 financial crisis in fairly plain terms. (I finally picked up the book but it's in the queue on my shelf.)

One is addictive and the other is not.

You are not required to gamble by law.

It seems obvious? Insurance means you pay to protect against a loss, gambling is paying to potentially gain?

Most insurers will not insure you unless you are at risk of a loss. For example, you can't buy a homeowners policy for a house you don't own.

> Most insurers will not insure you unless you are at risk of a loss.

This is why it is non-obvious. There is no risk of loss without a gamble. As you point out, insurance only comes into play when you are gambling – you cannot insure that which you have not gambled on. So if gambling is wrong, why is a tool to help you gamble right?

> you cannot insure that which you have not gambled on

That doesn't follow at all. People don't buy houses to "gamble it doesn't burn down".

Not in the sense of the word "gamble" is being used.

Right, people gamble on houses to provide them shelter. Insurance hedges against the risk of losing.

No, they buy houses to provide them shelter.

Just using the world “gamble” in a sentence doesn’t make it so.

> No, they buy houses to provide them shelter.

While the odds are good, buying a house does not guarantee shelter. One has to place a bet that the house will provide the shelter that they seek. If one loses (e.g. the house burns down), that's it. It was all for not. The loss is very much real. The only way you get to play again is to buy a different house[1]. Literally gambling.

However, one can hedge the risk of the gamble by also purchasing insurance. With the right insurance, the insurance will help buy another house in which one can take another bet on. So, again, insurance may not be gambling[2], but it is a tool used to help one gamble. It has no applicability outside of gambling.

> Just using the world “gamble” in a sentence doesn’t make it so.

Are you confusing gambling with gambling for the sake of entertainment? You have a point that buying a house or selling insurance is not like playing a state lottery or casino games. However, that is not what the article is about[3], nor would any reasonable person think that is the only form of gambling.

[1] Repairing it, if possible, but as far as this discussion goes that is the same as buying a different house.

[2] From the buyer's point of view. The insurer gambles (in turn, hedged by reinsurance) when a policy is sold.

[3] It does not seem to be able to find any difference between gambling and (selling) insurance. It is not written about fun games of chance.

If you know what a Tontine[1] is, you'll understand there really is no difference between Insurance and Gambling.

1. https://en.wikipedia.org/wiki/Tontine

Well insurance is in case something you don't want happens (die young) whereas a tontine is in case something you do want (live long) happens.

I'd call that a major difference but then again I'm biased.

I'm trying to figure this out, gambling is a zero sum game. The gamblers are the only ones bringing money to the table, the bookies take a cut, someone loses and someone wins.

Is insurance a zero sum game?

I think...sort of?

The insureds are the only ones bringing money to the table, the insurers take a cut, someone loses and someone wins.

As a first-order approximation, yes they're both zero sum in expectation. The amount lost is approximately the amount won in the long run, ignoring casino and insurance company expected profits.

At least that's true for for-profit insurance. When governments get involved, the line may blur between insurance and welfare, making it less zero sum.

In insurance you expect to come out ahead in the average case.

In gambling you expect to come out behind in the average case.

Therefore insurance is rational and gambling is irrational.

Both are rational... if reason is applied.

I've been driving 20 years and have never had an accident. I believe I'm the average case. Am I coming out ahead?

Yes, you are, if you can't “afford” the loss. And this does not mean that loosing the car bankrupts you.

It just means that reimbursing you for your loss is worth more to you than the insurance company, because it's harder for you to recover form a (e.g.) $10k loss than for the insurance company.

When priced correctly, and depending on your wealth, on average insurance can be a win-win (i.e. profitable) transaction for both parties. That's why it's economically useful.

See: https://two-wrongs.com/the-misunderstood-kelly-criterion.htm...

In insurance you expect to come out behind in the average case, unless you're an insurance company.

> In insurance you expect to come out ahead in the average case.

Not financially, no. On average people who buy insurance receive less in payouts than they pay in in premiums. If that were not the case, nobody would sell insurance because anyone who tried to would go bankrupt.

If you factor in the non-financial benefit of risk avoidance, then yes, people who buy insurance come out ahead--but now not just in the average case, but in all cases, at least as long as the people buying insurance are rational and only buy the amount of risk avoidance they actually need.

Oh I meant from the perspective of the one selling the insurance, not the person buying it.

Then how is this valid?

>In gambling you expect to come out behind in the average case.

Casino usually wins :)

Insurance is not about coming out ahead on the average case. In fact, it's the insurance company that comes out ahead when you average everything (otherwise they wouldn't be a business). You pay for insurance to come out ahead of (or equal to) the 40th(-ish) percentile cases.

> In gambling you expect to come out behind in the average case.

Depends on the game - poker for example (home game not at a casino, no rake), on average no one wins or loses.

Is gambling irrational if you are the house or bookmaker's side of the transaction?

I find preventive insurances as business with fear for wealthy clients.

I never spent a cent for unnecessary insurances.

you don't really go broke by having too many insurances - at least that's not very common. but you can go broke by gambling and such become a liability to family and friends. actually it makes more sense to compare gambling to _not_ having an insurance. pretty simple.

If you enjoyed this article I recommend the "Cautionary Tales" podcast by the same author.

If this sort of thing interest you I can recommend the authors podcast “Cautionary tales”.

The same reasoning that makes mountain climbing legal but street drugs illegal, I imagine.

it seems obvious to me...

one is a guard against losing stuff you have

the other is a short cut to riches you don't

Also life is full of gambles. Not buying insurance is also a gamble and a statement of gambling. You are betting that the undesirable doesn't happen, and avoiding to pay the insurance.

Driving a car is a gamble and a bet that an accident won't happen.

That is a good way to put it.

The messy middle between gambling and insurance is "investing".

There's nothing wrong with gambling as long as you are aware of the odds and make intelligent decisions based on them. Same with insurance.

Where both insurance and gambling go wrong is when people try to appeal to your emotions rather than logic.

> There's nothing wrong with gambling as long as you are aware of the odds and make intelligent decisions based on them.

Essentially if you’re aware of the odds and make intelligent decisions based on them there is no_____ _____ ____ gambling.

I have no idea what the ____ _____ ____ is supposed to be, but I'm guessing it is a string of negative words.

And yes, thats the case. Everything in life is playing the odds.

“thing wrong with” - it was a play on the quoted sentence

The former increases risk and the latter reduces it.

In Economics, risk is outcome variability. It's a cost if you're risk-averse (i.e. generally sane) and a benefit if you're risk-loving (i.e. mildly nuts.)

To mitigate the problem of vast numbers of people being mildly nuts, governments invented lotteries. The idea is to maximize the thrill/price ratio and steer people away from gambling addiction - at least to the extent that they're a sufficient fix and not a gateway drug.

Next up: What makes Russian Roulette wrong but climbing a crane to build a hospital right?

At least the crane version is a somewhat-interesting example in that you're increasing one's risk to reduce another's. The linked article is just plain dumb.

I remember when I was in high school I learned about expected utility and went around telling everyone they were idiots for buying insurance. Then I learned about risk aversion and felt really dumb...

In one you bet on yourself, in the other you bet against yourself.

There is nothing either good or bad but thinking makes it so.

ouchie

Insurance is different from gambling because if you pay and things go well, things go well. If you pay and things go badly, things go a lot less badly.

In fact, insurance is the exact opposite of gambling. Gambling is all about risking it all. It's an activity that sits at the extremes of the bell curve. You win it all, you lose it all. Insurance on the other hand is a small price you pay that, through statistics, allows you move your odds from the ends of the bell curve towards the center. If you win, you win a bit less because you have to take into account the Insurance money you spent. If you lose, you lose less because the insurance premiums will kick in.

Basically, insurance is a PID controller.

First off thats just reinforcing the grayness of the difference. Where exactly on which exact bell curve does gambling stop and insurance start?

Second, the one thats even more ambiguous is insurance from the perspective of the insurer. It's just gambling with a payment plan, that HOPEFULLY doesn't turn into a ponzi scheme.

I think they are on different sides of 50% probability. Insurance helps mitigate a low-probability risk. Gambling provides a low-probability chance of a big reward.

Socially the presence of a small number of really destitute people is a problem, so we moralize the process to prevent it as “bad.” The presence of a small number of really rich people is, like, neutral or negative, so we don’t moralize the a thing they produces them as good.

It is a bit weird that we don’t moralize the rich as good in this case, given that we often do do that. Not sure what’s up there. Maybe gambling is uncomfortable because produces rich that aren’t seen as deserving somehow.

> I think they are on different sides of 50% probability. Insurance helps mitigate a low-probability risk. Gambling provides a low-probability chance of a big reward.

Trivially not true- I can wager on a heavy favorite to win at very low payouts

>Where exactly on which exact bell curve does gambling stop and insurance start?

I don't think it has to come from me that the world isn't black and white.

>It's just gambling with a payment plan

If it's all so gray, why couldn't you say "gambling is just a riskier insurance" then? You only consider one of the two possible directions, namely the one that puts insurance under a bad light.

> Where exactly on which exact bell curve does gambling stop and insurance start?

That's not the difference. The difference is that in gambling, you accept a large variance in payoff, whereas in insurance, you don't; you transfer that risk to someone else.

In gambling you pay someone to take risk for you. In insurance you pay someone to take risk for you. They are the same tool; we just give it a different name when we’re hedging from when we’re speculating.

> In gambling you pay someone to take risk for you.

No, you don't, you take the risk yourself. You're certainly not paying the casino to take risks for you; you're paying them for the privilege of you taking risks (and losing on average) by playing their games.

You’re paying them to take the higher variance end of a swap. That is exactly the same transaction as insurance, complete with the same pricing model.

There's no bell curve.

Insurance is hedging against the value of something you have an interest in (which takes the form of a bet against that thing).

Gambling is betting on a thing.

So a short option on a stock (betting against it) would be:

a) insurance if taken out by the company, or a shareholder, or someone with stake in the business

b) gambling if done by a random third party

There's a moral component to the definition.

There’s nothing moral. It’s gambling either way.

The only confusion comes from people who bend over backwards to convince themselves they aren’t gambling because of weird “it’s a sin” morals that leak into their mind.

Betting against a company by shorting has no different moral component than betting on a company by investing. Either way you aren’t doing work and are taking risk to get a higher return.

Insurance products have different risk curves but they are still gambling. Someone can buy a ton of garbage houses, buy bunch of insurance, and just hope they burn down for the payout.

> Gambling is all about risking it all.

There are also plenty of people who can maintain control of their finances in the face of internal gambling biases and manipulation from the other parties (like casinos.) I don't gamble, but I do believe that most gamblers are in the middle of the extremes.

You could overcommit to insurance products/premiums, but I think there's more regulation there and less of an addictive aspect -- which is why we don't really hear about it.

"Risking it all" was not referring to being a gambling addict. It simply meant that if you put 10k on black and the ball goes on red, you lose all of the 10k

Same as if I buy a 10-year term life insurance policy and don't die during that decade. I lost all of the full premium paid.

You will live those 10 years with more peace of mind, which is the only reason to have life insurance since once you're dead you're dead

Peace of mind isn’t the reason. It’s leaving family stuff because you care about them.

No, the cost of a "jackpot" in life insurance is the premium plus literal life or limb. Only looking at the premium is penny wise, pound foolish. If you don't have the insurance and you die, your estate is out a million dollars because you skimped a few thousand.

> Insurance is different from gambling because if you pay and things go well, things go well. If you pay and things go badly, things go a lot less badly.

Counter: your belief about insurance is inverted from reality because your notion of what constitutes winning vs losing at insurance is backwards.

You lose at insurance by not having any circumstances that lead to payout. You win at insurance by having it actually do something for you. Dying is losing at life, but it's winning at life insurance.

Buying insurance is very literally betting that something expensive/bad will happen sooner rather than later or never, where the expected payout exceeds the expected cost to you. Selling insurance is betting the opposite, while, exactly like a casino, making sure that the sum of inflow stays greater than the sum of outflow.

> Gambling is all about risking it all. It's an activity that sits at the extremes of the bell curve. You win it all, you lose it all. Insurance on the other hand is a small price you pay that

This ignores the fact that many (most?) personal insurances are paid over and over and over and over again, because when you stop paying they stop paying too, and they all always cost more than they expect to pay. Every month you pay for health insurance and you don't get sick, that amount you spent is lost. Every time you insure an electrical appliance that doesn't break, the money you spent is lost. This is exactly like any other gambling loss. You gloss over that part by saying "but you have your health and that's good", which is absolutely true, but perversely not what you paid for.

You can choose to live your life without insurance, in which case you have to bear all the damage from bad events but you also benefit fully from good events, or you can live your life with insurance, taking less losses from bad events and getting less from good events.

As said, it simply reduces variance in your life/business. You have to choose if that's how you want to live your life.

> it simply reduces variance

Mostly I agree. That doesn't make it not gambling though.

> That doesn't make it not gambling though.

Yes, it does. As I said in response to you elsewhere, insurance means not accepting huge variance in payoff, whereas gambling means you do accept it. They're opposites of each other. The fact that the counterparties in both cases--insurance companies and casinos--end up making money from all of their customers on net does not mean the two things are the same.

If gambling and insurance were the same you would be able to both frame insurance as a form of gambling and gambling as a form of insurance.

I believe I said that insurance is gambling, not that all gambling is insurance. If not I apologize. So I should be covered by what I already said elsewhere, that buying insurance is betting (aka gambling) that a bad thing will happen sooner rather than later or never.

Now is all gambling insurance? Hmm. Maybe betting that something will happen is equivalent to insuring against its happening not financially benefiting you. Boom.

IMO the main difference is that insurance provides two good outcomes while gambling only one.

So you're buying car insurance. There are two outcomes: either your car will survive another year or you'll crash. First outcome: you're happy because you've got a survived car. Second outcome: you're happy because you've got insurance payout.

Now you're buying lottery ticket. First outcome: you won the lottery and you've got the prize. Second outcome: you didn't win the lottery and you lost your money spent on lottery ticket.

There are multiple comments in this thread doing exactly that.

> You can choose to live your life without insurance

No, in many cases you can't. Health, car, homeowners, and renter's insurances are mandatory until you are wealthy.

Health insurance isn’t mandatory in the USA. It’s a bad idea not to have it though. You might get away without insurance when you are young, however, assuming nothing bad happens. Without being able to price discriminate on pre-existing conditions, however, it’s not really free market insurance anymore.

Liability Car insurance is mandatory only if you use public roads, which most people do. Collision insurance is only needed if you have a bank loan. Homeowner’s insurance is needed for a mortgage, renter insurance is required by a landlord. You can avoid most of these insurances if you are really rich, but most rich people carry even more insurance because they have more to lose, so they will have umbrella policies, for example.

Ironically, it’s the really poor who can get out of having insurance: many states aren’t going to throw you in jail if you drive without a license or insurance, so now other people need uninsured driver insurance. Heck, it’s way too common where I live that many people have no insurance, even if our state requires really low levels of coverage. Health insurance is only needed if you have assets the hospital can sue for, but you will be going to the ER for everything so that sucks.

Well sure, if you are willing to violate a few laws you don't have to get insurance.

Insurance (outside of health insurance, which is not insurance in the typical sense) hedges your "bet" so it's not gambling to me. Your bet is that you'll drive a car without an accident. Insurance hedges that bet to reduce downside risk if there is an accident.

You're paying a small amount to avoid a large loss, on purpose, knowing that it may not happen. You're not trying to get more out of it than you put in (at least on purpose) because that's fraud. Doesn't sound like a bet to me...

> Your bet is that you'll drive a car without an accident.

That's the ideal outcome, but it is not the bet being made by the person buying insurance. In fact the opposite. If you believed that you wouldn't have an accident you would not buy insurance. You buy insurance because you believe that you will likely have an accident at some point and that the accident will happen either soon enough or seriously enough that the cost of covering the accident will be greater than the total cost of insurance up to that point.

> You lose at insurance by not having any circumstances that lead to payout. You win at insurance by having it actually do something for you.

You are misunderstanding what insurance is for. The benefit that insurance conveys for the person insured is not that it is supposed to make money. It is risk avoidance.

Without insurance, you might pay zero, or you might pay a very large sum that you can't afford. With insurance, you pay a predictable sum periodically, no matter what happens, and the insurance company is the one taking the risk of either paying zero or a very large sum, which hopefully the company can afford.

In other words, just as the GP said, insurance is the opposite of gambling. In gambling, you accept the huge variance in payoff. In insurance, you transfer that risk to someone else.

> Every time you pay and nothing bad happens leading to payout, that amount you spent that month is lost

No, it isn't. You are getting something of value to you in return: risk avoidance. If that is of no value to you, then don't buy insurance. You might not regret it. But then again, you might.

> The benefit that insurance conveys for the person insured is not that it is supposed to make money.

Presuming you mean ending with more money than you started, gambling isn't either. Pay in vs pay out has no relation whatsoever to that except in passing.

> It is risk avoidance.

These are the same thing dressed in different names. There's only no making money on health insurance in the sense that you don't get to keep the money, but the only reason you're not "making" that money is because you have just incurred medical debt that the given money is obligated to cover per the terms. It's exactly the same as giving the money directly into your pocket on the condition that you use it immediately to clear your medical debt. You "made" all that money. You just also owe the full amount to someone else too. Consider term life insurance instead, where there is no extreme debt obligated to cover and your next of kin does just actually get a fat check.

> Presuming you mean ending with more money than you started, gambling isn't either.

That's true, but it doesn't mean insurance and gambling are the same thing.

> These are the same thing dressed in different names.

No, they're not. In gambling, I accept the risk involved in a wide variance in payoffs, for the entertainment value involved (since I can imagine that I might be a big winner); on net I am paying money for entertainment. In insurance, I transfer the risk involved in a wide variance in payoffs, for the peace of mind of not having to worry about being bankrupted if a rare but catastrophic event occurs; on net I am paying money for peace of mind (since I don't have to imagine that I might be a big loser).

> Consider term life insurance instead

But your next of kin only gets a payout if you die during the term. If you don't, nobody gets any payout and all the premiums you paid are lost. Which, since insurance companies make money selling term life insurance, is the expected average result. So on net, you do not make money buying term life insurance--but, as above, you might still do it if the peace of mind involved is worth it to you.

> your next of kin does just actually get a fat check.

But they are losing you--and even if we go to extreme cynicism about that, they are losing whatever income and other goods and services you provided, for which the check will hopefully be enough to compensate them. So it's not a pure gain with no offsetting loss, even leaving out the premiums paid.

> But your next of kin only gets a payout if you die during the term. If you don't, nobody gets any payout and all the premiums you paid are lost.

Yes, aka gambling.

> But they are losing you

That is true AND it is not what you paid for. Just like health insurance isn't paying for health but rather for coverage of bills related to loss of health. Being healthy is a win for health but not a win for buying health insurance. Being alive is a win for living but not a win for buying life insurance.

> That is true AND it is not what you paid for.

You're qubbling. You paid for replacement of the income and goods and services you can no longer provide, in the event of your death. Sure, that doesn't replace you in the eyes of your beneficiaries (assuming we're not taking the extremely cynical viewpoint about that), but of course nothing can replace you in that sense.

However, if your beneficiaries are financially secure enough that they do not need the insurance payout, i.e., if they're not depending on you for income or goods and services, then you should not be buying life insurance: you should be spending the premiums on something with a positive expected rate of financial return. The only reason to buy insurance in the first place is if your beneficaries are depending on you and will need something to replace you financially if you are no longer there.

No, the other poster is actually right. In betting on outcomes, there are two roles - bet (“long”) and lay (“short”). An insurance company is exactly a bookmaker; they are buying a bunch of risk and being paid a vig (or in the case of long-duration bets and life insurance, getting the carry) on each of those risks.

This is indistinguishable from insurance, particularly when the beneficiary of insurance isn’t the subject (key-person insurance, for example, which you can view life insurance as a form of).

You’re saying that because these are morally different - which I don’t actually believe, given that options trading is another equivalent form of hedging/speculation, but I will grant - these are different things. But “fire which I use to cook dinner” and “fire which I use to torch a car during a riot” are both fire; the goal is different, but the object used is not. Let’s say I hedge a bunch of political risk by betting on politics. How is that different from buying a custom insurance policy from Lloyd’s or engaging in a bunch of interest rate swaps?

Drawing a distinction between betting and insurance on those lines is the same thing as saying “being long in a stock is morally good, being short in a stock is morally bad”, and I don’t think that position holds up.

In your scenario, you are using gambling as insurance, and that's different. If you bet $20 on the Greenfeet it's not because something bad happens to you if they win.

Isn't the fact that you cand use gambling as insurance and insurance as gambling support the idea that they are the same? If it all depends on the context, then it's not the activity that is different, but the context.

To me it sounds like you're saying whenever you like it, you will call it insurance, and whenever you don't like it, you will call it gambling. "It" is not apriori anything, until you have decided what you want to call it. That makes it all the same thing, pretty much.

You can use some gambling products as insurance, but insurance products are designed so you cannot use them as gambling. At least in terms of products sold broadly to the general public, which is the main situation where people worry about gambling being immoral.

As other commenters mention, the main way this works is by making it impossible to "win" at insurance. You aren't hoping for the rare payout event to happen, like you would be when gambling. Having your house burn down, or getting into a car accident, or needing treatment for cancer, or dying are all really bad even if insurance reimburses the monetary costs involved.

This is probably why the concept of "insurable interest" exists; without it, it would be possible to use insurance products as gambling.

You’re using a tool and choosing to give the tool different names based on how you feel about it.

If I’m the landlord of a pub in Glasgow, and Scotland get to the finals of Euro 2024 (we won’t, but work with me here), betting on Scotland losing the final is a reasonable hedge against the profits you’ll lose when everyone goes home depressed after the final rather than buying another round. Is that a contrived example? A little bit, but it’s structurally reasonable. (If you’re a sponsor of the Scotland team, gambling on the result could be hedging media risk).

Can you leverage yourself up? Yes, but you can do that in the stock exchange or futures market too. They’re all the same thing.

No, betting on the Scotland game to try and hedge expected profit loss doesn’t turn it into insurance. The payout isn’t tied to the thing you want to hedge, so it’s just hedging your bets (gambling payout vs beer sales).

Insurance might be a kind of “hedging” but in a limited way that makes it not gambling.

In general, you are not able to buy insurance for more than the value of something. If you could, that would be a form of gambling. But up until that line it's anti-gambling.

Buying a position out of nowhere is gambling. Buying a position to directly counteract the position you already have is not gambling.

If you short 50 shares of a stock when you already owned 80 shares, you are doing the opposite of gambling. You are reducing your position.

I would describe every single one of these as active risk management - and the difference between one sort of active risk management and another is vibes, not reality. There’s an implied moral judgment here that gambling is inherently bad.

I don’t think gambling is inherently immoral; I think mismanaging risk (in either direction) is one of the ways people mess themselves up and therefore encouraging people to take bad risks is immoral. This is not quite the same thing, though it’s close - but the difference between these two positions is what led to prohibition.

Don’t get me wrong, bookies are awful in many ways, but so are bars and crypto exchanges and E*Trade. The right approach in all cases is harm reduction.

The difference is not vibes! Reducing your position is the opposite of increasing your position, and those things are very objective.

If someone has an equal number of short and long shares in a single company, they are not gambling. Surely we can agree on that, right? We don't have to use the word gambling, we can say they're not investing either. Their money does not change at all based on the stock market or any other external factors.

Now what if they have more short or more long shares. We can say that gambling or investing is happening, right?

What do we call the process of moving from a net-nonzero position toward net zero? Isn't it the opposite of gambling? Or the opposite of investing?

They are absolutely gambling; there are various ways that position can blow up. (Consider counterparty risk.)

What counterparty risk? You own stocks and you owe stocks. How can that go wrong?

But come on, counterparty risk with big institutions is such a small thing. Are you going to tell me that putting your money in a vault is gambling because someone could steal it? Is subscribing to Netflix gambling because the servers might go down?

Having a net-zero position is the closest to not gambling anyone can get.

How about this, can we agree that having short or long stocks is a high number out of 10 on the gambling scale, but just counterparty risk with an enormous company is a 2 out of 10? What do we call the process of reducing your number from high to 2?

> the goal is different, but the object used is not.

That’s not how the English language works. Insurance is a noun (I have insurance) but gambling is not (you can not possess a gamble). In your analogy, you would “cook” your food or “commit arson.” The purpose of your action is intrinsically tied to the words we use to describe it.

Gambling is engaging in a game of chance to get a favourable outcome. Insuring is paying money now to mitigate the risk of losing more money later. The fact that both are financial activities doesn’t mean they’re the same thing.

> In betting on outcomes, there are two roles - bet (“long”) and lay (“short”).

I have no interest in the Humpty Dumpty principle of word usage. My point was not about the names we use for things, but about the things themselves. You can't make what has been called "gambling" in the discussion up to now the same thing as what has been called "insurance" in the discussion up to now by changing the words you use to describe them.

> You’re saying that because these are morally different

I have said nothing whatever about the relative morality of gambling vs. insurance. I have only pointed out that they are not the same thing, they are opposites--gambling is taking on risk, insurance is transferring it.

Both are transferring risk. If I insure against political risk, is that any different from betting on the presidential election? No, it isn’t. The distinction between insurance and gambling is cultural, they’re both just risk swaps.

> There's only no making money on health insurance

Health "insurance" is mostly not insurance: it's a healthcare plan for periodic maintenance and minor incidents combined with an insurance plan for large and catastrophic incidences.

When I buy car insurance, they don't give me 4 free (or even discounted) oil changes a year. Car insurance exists for large and catastrophic incidences. Same with home insurance.

Actual health _insurance_ plans are much cheaper than healthcare plans, but they also only cover large and catastrophic incidences.

> Health "insurance" is mostly not insurance: it's a healthcare plan for periodic maintenance and minor incidents combined with an insurance plan for large and catastrophic incidences.

Precisely.

You/your employer pay a premium.

Then you have a deductible.

Then your "insurance" company has the unmitigated gall to also include "co-pays" (which are on top of your deductible, as well as after meeting it), AND "co-insurance" (even if you've already met your deductible)...

AND then they'll refer to it as "your contribution to your healthcare costs". I suppose that is somewhat accurate but still...

Imagine your car gets totaled. Your insurer says "Hey, we're going to pay out $25K for your vehicle. So you have a $1,000 deductible, so that's $24,000, and then your copay for a total loss is $2,000, that brings us down to $22,000, and for total losses, your coinsurance as your contribution for your vehicle coverage is 20% which is $5,000 so here's a check for $17,000."

I know it exists in certain very limited contexts, but if it weren't for all the regulatory capture, I could easily see companies that say "We'll negotiate bulk discounts with these providers. Everything else is on you. Pay for what you use."

> You are misunderstanding what insurance is for. The benefit that insurance conveys for the person insured is not that it is supposed to make money. It is risk avoidance.

I buy a lottery ticket as an insureance against the risk that I won't become rich if the right lottery number become picked. :-)

The difference between insurance and gambling is about what happens to your risk - whether it's a hedge or not.

When you buy insurance, you pay a premium to make you whole should a random event occur in the future. You exchange a payment for certainty about future cash flows with respect to the insured risk.

When you place a bet, you do the opposite. You exchange a payment for uncertainty about future cash flows with respect to the subject of the bet.

If you insure against a risk to which you're not exposed (like: you take out a life insurance policy on a person you don't know with you as the beneficiary), then yes - that's risk taking rather than hedging.

Commodities futures have similar aspects: if you're an aluminum producer then you can trade futures in order to reduce your exposure to variations in the market price. On the other hand, if you're a hedge fund trading those futures then you're probably doing the opposite - looking for exposure to risk.

If you're going to take the position that a known cashflow now that returns an uncertain cashflow in the future is "gambling" then essentially all forms of economic activity are "gambling". It's reductio ad absurdum.

Mind you, in the US, you are not allowed to take a life insurance on a person you don’t know (but you are allowed to buy a life insurance that person had taken on themselves)

Cue flashbacks to Walmart buying life insurance for its employees (with Walmart as the beneficiary)...

... and the oh-so-charming way they referred to it at head office: "Dead Peasants Insurance".

It is a derogatory industry term, also called janitor insurance. I can't find a source that says they called it that internally, which I think is relevant to the image being painted.

I did find that winn-dixie (a grocer) insurance consultants did use the term internally. Source: https://www.wsj.com/public/resources/documents/april_19.htm

I would express it differently.

With insurance, you are guarantee to lose. To insure against a 10K risk, you have to pay 20K. 50% of your premium goes towards staff, advertising, profit, etc.

But you reduce variance.

>But you reduce variance.

Yes, and turns out that having more consistent results is what keeps the economy going.

Also, the only reason gambling exist is because you are guaranteed to lose. The house always wins, statistically.

That's not how I'd express it either. Insurance is a positive EV bet on a log-utility basis

> With insurance, you are guarantee to lose.

No, you're not. There is no guarantee that your payout on a claim will be less than the value of the premiums you paid in at the time you make the claim. Averaged over all people being insured, that will be true, but you are just one person, not the average of all people.

> To insure against a 10K risk, you have to pay 20K.

No, to insure against a 10K risk, you pay some much smaller premium periodically over time. There is nothing that says you must have paid in 20K in premiums before the insurance company will pay out 10K on a claim by you. The insurance company is insuring a huge number of people; all they care about is the average result, not the single result in your individual case.

Also, all the above assumes that only monetary value matters to you. But monetary value alone is not why most people buy insurance. Most people buy insurance for risk avoidance, i.e., peace of mind. They want to transfer the risk of having to make a large payout if something bad happens to someone else who can better afford it. That is a thing of value to many people, which is why they are willing to pay for it.

> No, you're not. There is no guarantee that your payout on a claim will be less than the value of the premiums you paid in at the time you make the claim.

With insurance it’s very difficult to get more than the market value out of the destroyed thing on payout. Even if you ignore premiums you’re usually just breaking even. This isn’t a law but it’s something insurance companies wised up to pretty quickly because the incentives get pretty attractive to commit insurance fraud when there is profit involved.

> With insurance it’s very difficult to get more than the market value out of the destroyed thing on payout.

Yes, of course. But that's not what I was talking about. I was talking about whether your payout is less than the value of the premiums you have paid; it can be even if the payout is not more than the market value of the destroyed asset.

To take an extreme example, suppose you buy a house for $100,000 and insure it for that value, and the next year the house is destroyed by a covered event. Your insurance payout will be $100,000 (which will be spent in rebuilding your house), which is the market value of the house, not more, but you are certainly not going to have paid anywhere close to $100,000 in premiums, so your payout will be much more than the premiums you have paid.

Of course this situation will be very rare, but that's the point: the insurance company certainly cares about not paying out more than the market value of the asset (for the reason you give--protecting against insurance fraud), but they don't care in an individual case about not paying out more than the premiums that were paid in by that individual customer. They only care about the latter on average, and of course their actuaries get well paid to make sure their premiums are high enough to ensure that they still make money on average.

"Gambling is all about risking it all" a blanket statement which is not true.

gambling is about risk / reward management.

there are bad gamblers and good gamblers.

a good poker player for example employs bankroll management to avoid going broke due to variance (expected downswings) [1] and their game-play decisions are driven by math.

[1] https://www.primedope.com/poker-variance-calculator/

Insurance companies are like casinos:

Playing at a casino, I’m almost guaranteed to lose money (unless I’m a very good poker player — the house and I can both win there); if I’m lucky, I can win big. If I buy insurance, I’m almost guaranteed to lose money; if I’m unlucky, I can get reimbursed for losses.

From: The House Always Wins — Casinos and Insurance Companies — https://kriswilliams.medium.com/the-house-always-wins-casino...

Yes, you always lose a bit of money with insurance, but life isn't all about money, whereas the whole point of gambling is winning money. Insurance brings other benefits that improve your life.

> Insurance brings other benefits that improve your life.

What other benefits besides the money that covers the losses?

Hedging risk. This is often a hard concept for people to grasp: there is value to hedging risk. It (generally) cannot be turned into money. There is extrinsic value to reducing risk.

But you are only able to hedge the money part of the risk. Life insurance does not bring anyone back, and health insurance only repairs your health as much as can be done with money. You can't insure against incurable diseases, as in the risk remains. You will just get some money to hopefully feel better, or for your children.

Same with insuring some painting let's say. You can get enough money to buy a different painting, but the risk of losing that particular painting is still there. If it is a unique painting and it gets lost, how are they going to repair the non-monetary value of it? They can't.

Hedging the risk of being shot by wearing armour sounds like actual hedging. Buying insurance against being shot sounds like just betting. The non-money part is exactly the difference, and it is missing in insurance.

Yes, you are hedging against financial loss. Most of the other stuff you describe, e.g. sentimental value of one painting vs another, are irrelevant to insurance. You pay a (relatively) small amount to eliminate the risk or mitigate the effect of getting a massive (specifically financial) loss.

There is also the combination of self insuring. 0 An old boss had a dozen kids and his own personal business so he self insured his fleet as well as all the of age kids as employees. Gambling isn't about risking it all as some bets are safer than others for less rewards.

0. https://www.policygenius.com/auto-insurance/what-is-self-ins...

> Gambling is all about risking it all.

I would say that gambling is about paying for entertainment, much like lotteries. Your overall expectation is that you will lose money, but the entertainment value of being able to imagine yourself winning a huge pot compensates for that.

Of course the above assumes that you can afford to lose the amount of money you are gambling. The few times in my life I have gambled, that was always my approach: I set aside an amount I was willing to lose all of, and if I got to the point where it was gone, I stopped. But of course many people who gamble do not take that approach.

Having insurance is gambling, but not having insurance is also gambling. This is because life itself is a gamble. We don't know what the future holds and we have the choice to insure or gamble on just about any aspect of our lives.

Insurance companies are just like casinos in that the math always favours them if you look at a sufficiently large sample size. Even so, some things are still worth insuring. e.g. Your house. Most people do not have enough assets saved up to replace their house should it burn down. Even though your house will likely not burn down, protecting yourself against the loss of something you can't easily afford to replace is worth spending money on.

Does it make sense to insure things you can replace though? Consider the "Instant product replacement" plans that stores constantly try to sell you. If your monitor dies you can easily absorb the cost of buying a new one. If, instead of buying IPR's on everything, you set aside a similar amount of money, you'll likely soon come out far ahead. Even if you don't, you'll still be able to afford it. Buying IPR's means, on average, you lose money. Not buying IPR's means, on average, you'll save money. The choice is easy.

Insure the big, vital things you can't afford to replace. Treat insuring small things as gambling without the fun.

What about the gamble that the whole thing is a scam from the beginning? If they are going to fight tooth and nail to never payout anyway its all insanity.

Also how could insurance ever be a "for profit" business? That could never work. Profit means straight up planning scam right from the beginning, hoping that a big enough payout triggers business failure and you dont have to pay out anyone, yippee free and clear rug pull

I think thats why states usually regulate the industry

>Also how could insurance ever be a "for profit" business?

What? They plan to take in more in premiums than they pay out in claims by managing risks and underwriting.

In that sense it's like a bookmaker who plans to set a line on a game that results in bets not having an imbalance that outweighs their vigorish. In cases where they do they lay off bets on other bookmakers. It's why they tend to be concentrated on certain areas and the same is true for insurance.

Both of those are legitimate for profit businesses that use statistical modeling and risk management to turn profits and provide value to customers.

> take in more in premiums

Also, prudently investing the insurance float (excess premiums beyond that needed for claims)

> prudently investing the insurance float

More gambling! What I find interesting about this question is that insurance companies are the real gamblers. Attempting to frame their clientele as gamblers approaches absurdities such as a limited opportunity to spend, and most importantly, a strict cap on "reward" lower than the cost to "play" (entry fee for a new car is the policy rate plus a car of equal or greater value).

Whereas insurance companies are gambling on both ends: with their customers' potential losses and with their float on the investment market.

I am sure your life experience shapes that opinion but it is far from the truth. I don’t think these business ever hope for a total loss. It would make no sense.

I also don’t think a nonprofit or government can do an adequate job of offering insurance. Let’s ignore health insurance but rather define insurance in the base form as an entity paying out if an event happens.

In a for profit model you have multiple agents each evaluating risk and the costs to cover that risk. Ideally enough agents exist that they compete to keep costs low. Certainly sometimes this is not always true.

Spot the person who has no idea how the insurance industry actually operates or is regulated.

Back in the dark ages, the University I worked for had a lab full of computers stolen. I discovered that the University did not have insurance for this, or for a lot of things, because the University was a large organization with a lot of assets and could easily absorb the cost of theft. I'll assume they got the risk analysis right, since they wrote the textbooks on that sort of thing.

The math changes though if you are dealing with a non-profit insurance system. For example, becoming a member of a well designed co-op, or a genuine non-profit insurance company (one that returns excess to members rather than pay bonuses to executives). But still there are problems, since not every member brings the same amount of risk, so you get a good deal if you know you are higher risk than the insurance company believes and vice versa.

Not uncommon for universities to self-insure. I don't know if they commonly reinsure, but I would assume they do.

I think this profit-vs-non-profit thinking is reductionist. A non-profit insurer still has expenses. They have to pay their staff, rent offices, pay vendors, and so on. In fact, nothing stops them from spending more than a for-profit corporation would.

Anyway, the math doesn't change: the insured still pay more than they are getting back.

Only thing I insure is umbrellas. They never last more than 2-3 years and a 7 year replacement plan for like 8.99 is a reasonable deal. Anything else I tend to just go with credit card purchase protection and MFR warranty.

Insuring your tires at discount tire/America's best tires is always worth it too.

I expect this is true depending on where you are, and the quality of roads you drive on.

I've been driving for 36 years now and have never had a tired damaged more than the very occasional puncture.

I could go out tomorrow and damage one, but by this point I can consider myself "self insured".

> I've been driving for 36 years now and have never had a tired damaged more than the very occasional puncture.

I typically go through a tire a year. The city I live in (Seattle) will pay to replace the tire if the loss was due to a pot hole, but you have to take a picture of the pot hole, which can be a bit hard to do in many circumstances.

There have been years where I've paid more for tires than for gas. :/

That's crazy. I've lived in Seаttle for 7 years and only had to get a tire puncture sealed at Le Schwab, never had to replace one.

Why's that? They're selling the insurance plan for a profit, after all. The expected return, from the buyer's point of view, is negative.

If your financial situation is such that you'd be in trouble if you had to replace a tire, then sure, but tires aren't that expensive.

What credit cards offer protection these days? All of mine seem to have done away with it. For umbrellas, I bought a Tumi, which is insanely expensive (was $40 when I got it; I think it's closer to $60 now), but which has a lifetime warranty.

>>Having insurance is gambling, but not having insurance is also gambling. This is because life itself is a gamble. We don't know what the future holds and we have the choice to insure or gamble on just about any aspect of our lives.

You could say insurance is an attempt to stop the fortune to gamble against you for a specific case (like flooding your house). You are already the party in a gamble and insurance is a way out.

Both are lottery tickets if viewed from a pure financial contract perspective.

Utility of a particular contract to a buyer is subjective.

In other words, insurance is gambling's antidote. Gambling takes on a risk, insurance hedges against the risk taken.

But if gambling is wrong – implying you shouldn't do it – what do you need insurance for? If you never gamble, you don't need to hedge the gamble. If gambling is wrong, then insurance must also be wrong by association.

Perhaps it is not gambling that is wrong, but rather gambling for the sake of entertainment? That would have no doubt been seen as a diminishment of hard work under Protestant eyes. In other words, farming would have been seen as okay because it requires hard work, done for a purpose. A casino game, on the other hand, would not be acceptable as someone may gain (over and above the fun value) while having fun.

So far, I have made use of my car insurance policy two times. Each time I regretted it. First was for a rodent that somehow got into the space between the roof and the headliner, then died and made a mess. The second was for hitting a pothole at highway speed, which damaged a wheel and its control arm.

In both cases, the insurance company paid the minimum they had to. For the rodent, sure they paid for the ceiling to be disassembled, fixed up, and reassembled. But did they pay for the interior detail that was necessary because of the rodent guts that had dripped from the ceiling? No, of course not.

For the pothole, they paid for the wheel and control arm replacement and even one new tire. But did they help me pay for a tire on the other side so the wear could be reasonably symmetrical? No, of course not. How about the alignment I obviously got, which isn’t strictly necessary but really should be done after such an incident and installing a new drive wheel? No, of course not.

Oh and they categorically consider hitting a pothole to be the driver’s fault, no matter the circumstances, so they raised the insurance premium on me. They made all of their money back within 18 months and now I’m still paying the higher rate.

Insurance is such a scam. The company makes a profit despite their team of employees because they always price the premium above your level of risk. If the math made any sense for the customer, the company would break even or go bankrupt.

I wouldn’t have insurance but it’s required in my state.

The one good thing I can say about it is it helps ensure victims of car accidents get their medical bills paid for regardless of the financial status of the driver.

> I wouldn’t have insurance but it’s required in my state.

Does your state require comprehensive/collision insurance? I've only lived places where you would be permitted to get liability-only insurance which would specifically not cover either of the situations you think you got screwed on.

(Neither of which is why most people get insurance anyway. You get car-insurance beyond the legal minimum because while you will likely pay more in the long run, you won't have to deal with a surprise tens-of-thousands replacement bill out of nowhere if you accidentally total your car. Or because you have a loan and your lender doesn't trust you to go without it - of course, if you truly don't need insurance for something, you likely don't need a loan for it either. This is generally non-controversial and the "obviously it's a bad deal because the insurance company exists and pays salaries" hot take is... duh? well known? not an insight?)

Insurance is primarily for major events. The things at the extreme upper end of the bell curve.

For example, you've hit another car (possibly an expensive one) and caused tens of thousands of dollars in damage. Or you've inured a passenger and caused hundreds of thousands of dollars of hospital bills.

The kinds of events that would financially ruin you, or at least seriously set you back on your life goals. Or, in the case of state-mandated insurance, where there's a high likelihood you wouldn't be able to make the other party whole.

You can use it on smaller things if you insist (and your rates will go up), but that's not really what it's for.

Personally, both the events you described fall under my definition of one-off maintenance ("things that are an unpredictable yet unavoidable cost of owning a vehicle") and that I'd expect to pay for out of pocket.

> Insurance is primarily for major events. The things at the extreme upper end of the bell curve

That's how it should be, but isn't because all insurance contracts cap the maximum insured amount. So that's absolutely NOT the "extreme upper end of the bell", not at all.

There are unlimited umbrella policies, but practically past 1 million or <net worth> it is probably cheaper to declare bankruptcy than pay the additional premiums.

Wouldn't you rather not lose $1+ million? It costs something like $400/year per $1M coverage which is hardly breaking the bank.

$400/year is a new laptop or something, if you spend the money then the creditors can't take it.

And that is one of the reasons why medical insurance is so crazy in the United States nowadays - it’s no longer used to hedge catastrophic unpredictable events (which used to be called “major medical”), but instead is used to pay for normal, minor consumption or for chronic conditions.

In other words it’s no longer like a bet, it’s like a discount plan. But the problem is that the complexity of introducing a third party payer who doesn’t want to pay, and a consumer who has no incentive to self regulate consumption, means that the costs spiral up and up.

> But the problem is that the complexity of introducing a third party payer who doesn’t want to pay, and a consumer who has no incentive to self regulate consumption, means that the costs spiral up and up.

The first part is correct but a consumer that “doesn't self regulate consumption” is not a thing in medicine. People don’t take drugs for fun. People don’t injure themselves more in public healthcare systems. In fact, a huge problem in medicine is getting men to go to the doctor before issues become critical (and more expensive).

People eating more than they should, getting diabetes, and then consuming more medical services is a form of poor regulation of consumption.

The overapplication of OxyContin is another form of unregulated consumption.

Now we have the semaglutides and will see the same effect.

The USA has a 38% obesity rate vs the UK at 29% (for men). Given both exist quite far apart on the public/private healthcare debate, I don’t see how this supports your argument at all.

Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7670332/

I’m not going to debate the others because I don’t know much about them and, since your argument fell apart at light prodding, I don’t think you do, either.

I was not making an argument about the public/private healthcare debate. I am objecting to the assertions 'a consumer that “doesn't self regulate consumption” is not a thing in medicine' and 'People don’t take drugs for fun.'

I was similarly convinced that moral hazard in healthcare was not a problem because consumers don't get more healthcare than they need. I know now that this is not the case.

I’m not making a public/private argument either. The full sentence was:

Obviously, people do eat to excess, engage in activities that have risk (and die as a result).

Whether you pay or someone else pays does not factor in these decisions, which is why I pointed to obesity rates in UK/USA to demonstrate this. If such moral hazard existed, you’d see lower obesity in the USA than in the UK. You don’t, ergo, it mustn’t.

EDIT: By “take drugs for fun” I’m specifically referring to medical drugs in my original message so removed it from this one (where I conflated with recreational drugs).

OxyContin is a medical drug. I have unfortunately had to assist my mother with visits to the "pain clinic" and seen firsthand many patients with a problem with self regulation of consumption.

Maybe I am interpreting your assertions too literally.

Ok but I’m guessing you’re in the USA where you’d have to pay significant sums for that in some form, as long as you can convince a doctor to sign off.

I’m not aware of a similar problem in England, where prescriptions are currently £9.90 per prescription.

This is my point: the financial cost, as with obesity, is not regulating the behaviour.

Ah, now I understand why you are confused. No, most people with health problems in the U.S. are paying, at most, only a copay for a visit. They are getting medical treatment at no cost to them directly. It is paid for by an insurer or the state or Federal government.

This moral hazard is fundamental to our problem and why many have problems regulating their consumption.

Except this simply DOESN’T HAPPEN in the most famous free healthcare system on Earth, so clearly it can’t be a moral hazard. I also know for a fact these people aren’t getting this for “free.” I just checked and copay is subject to the deductible. Also, I seriously doubt insurance companies aren’t ramping up premiums on these people once they get a chance.

Are these people seriously going “well it’s only $26 a pop so I may as well.” Do you think the (apparently) low price is what’s causing this?

I believe that you have strong opinions of the system with which I have too much experience.

Many of these people are, in the case of pain clinics, getting their pills paid for by workers’ compensation carriers.

That the UK has avoided some moral hazards does mean that they cannot exist elsewhere. Maybe the UK doesn’t incentivize doctors to hand out more pills.

No, I have a strong opinion that the moral hazard of affordable healthcare doesn’t exist based on the lack of evidence. Americans (and the hard right of British politics) are the only group that even consider such an argument.

If there were a moral hazard to affordable healthcare, I posit that you’d see lots of it in a system where healthcare is mostly free at the point of use (prescriptions aside). The fact that obesity and opioid addiction happen in the USA at far higher rates than in the UK points to a strong indicator that this moral hazard simply does not exist. The fact is that the only examples you can give point to issues unrelated to “moral hazard.”

You have failed to point to a systemic pattern of risk-taking behaviour that is higher in a system with socialised healthcare than in privatised systems to convince me otherwise. You cannot because it doesn’t happen. Human beings, on the whole, do not engage in obviously dangerous behaviour more if it’s free to get treatment because we’re simply not that stupid.

I would very much like to move to live amongst the people that are simply not that stupid.

Now I don’t know if you’re just deliberately misreading my comments. At no point do I say “people don’t engage in dangerous behaviour,” I merely point out such behaviour is UNRELATED to the cost of healthcare. You’ve yet to show me any data that shows a link between affordable healthcare and moral hazard.

On the contrary, your only examples come from within a system famed for being the opposite.

I never claimed that there is a link between affordable healthcare and moral hazard. I argued only with two of your assertions which I have found to be unfortunately untrue, in my experience with the U.S. healthcare industry.

> I was similarly convinced that moral hazard in healthcare was not a problem because consumers don't get more healthcare than they need. I know now that this is not the case.

Except for… you know, right here.

I did not claim that the moral hazard problem is linked to affordability. You seem to want to argue with things I have not said.

That’s the “moral hazard” in healthcare that’s used against affordable healthcare. It’s the only context it’s used in.

Obesity and opioid addiction aren’t “moral hazards” in healthcare, they’re literally things healthcare and society need to deal with. We’re far off the topic of insurance and I don’t even understand what you took issue with apart from nitpicking a sentence at this point.

Your assumption about context is not relevant to my argument.

You’re right, it was my mistake for assuming words mean what they’re commonly used to refer to /s

Moral hazard has a well understood meaning outside of affordability. I would very much like to see the system in the U.S. make more sense. Any time spent in an emergency room or waiting room in the U.S. makes the moral hazard obvious.

And that is why the insurance model should not be used for healthcare. For example, why should an insurance company charge you anything less than the cost of treating a chronic illness after diagnosis? Why should the minimum price of giving birth not be the exact premium you pay? None of those are surprises (after the initial diagnosis or conception, of course, and it can obviously be argued that birthing complications can be insured against too), so there is no reason to use probabilistic models to pay for them.

The problem is price fixing deals between hospitals and insurers, where the insurer pays only a tiny fraction of the retail price. It's not economically viable for consumers to not have the "discount plan" as you aptly put it. That benefits the insurance company so they like it like that.

One way to solve this problem is to be part of mutual insurance instead of a private company. Not sure if that is an available option for you.

You can get a liability only policy.

> I wouldn’t have insurance but it’s required in my state.

As long as you have a few million set aside in case you cause one of the 45,000 deaths, or even more injuries, that happen on US roads every year, I agree with you.

But then you say exactly my point in your last paragraph… you’re all over the place here.

Insurance isn’t about pot hole damage. If you use it all the time, it’s a membership fee, not insurance.

In the UK we have multiple insurers competing fiercely on price, to the point where many lose money year on year. People still say it's a scam though because their experience when making a claim doesn't play out like they expected.

I think part of the problem is the unseen costs of long-term hire cars, injury compensation and outright fraud that has become an everyday expense that someone has to pick up the tab for?

> People still say it's a scam though because their experience when making a claim doesn't play out like they expected.

A friend of mine had her insured bicycle stolen.

It was locked up with an extremely heavy chain and lock, which were rated 'gold' by insurance companies for locking up motorbikes. Her insurance denied the claim, because the chain wasn't gold rated for locking up bicycles.

By all means get insurance - but when their marketing talks about being on your side or providing peace of mind, you gotta realise that weaselling out of paying claims is a big part of their business model.

Weasel? How do you expect it to work? There is a contract and the company is going to follow it.

They have lawyers preventing customers getting paid. One of those couldn't take it any longer and switched sides.

Perhaps in your narrative. I don’t believe that to be true for the vast majority of property claims.

Bicycle insurance is mostly useless unfortunately. We really need to do something about it if bicycles are going to be practical for more people. Cars get probably 100x the Police resource dedicated to them compared to bikes.

Bikes were not meant to be $1000+. Get a cheap one and set aside a monthly amount for replacing it. Don't get insurance on it. Get into an accident? You should already have health insurance to cover it.

They definitely don't need to be that expensive, but anything less than 500 credits isn't going to be very nice to ride. The sweet spot is something like 600-700 which is non-negligible.

I think one of the problems in the UK is too much of the competition is just on price. People buy what is cheapest on a price comparison site. They do not consider reputation for trying not to pay, or customer service very much (because there are either no metrics or unclear ones).

The same applies to things like internet connectivity. People look only at price and download speed.

I also think it is not worth claiming for minor things and you keep your no claims bonus - therefore you might as well get a policy with a higher excess.

In the UK damage caused by potholes can be claimed back from the local council. It's a pain in the ass but worth pursuing. I'm surprised the USA doesn't have the same. (Assuming you are in the USA!)

I believe most states have some ability to do what you describe. It’s a PITA too though.

Of course insurance companies need to make a profit. That does not mean they are scams. Hitting a pothole will almost always be either your fault or the local governments fault. Insurance companies are incentivized to make competitive quotes when possible.

Your thought of not having insurance demonstrates you are not thinking about this the right way at all. Your state requires liability which will pay out claims against yourself.

> Oh and they categorically consider hitting a pothole to be the driver’s fault, no matter the circumstances

Because it is your fault. How can someone force you to drive into a pothole at speed? Smooth roads build complacency, but you need to be on the lookout at all times. Most drivers are disastrously bad when it comes to understanding speed. Modern cars encourage awful habits.

Insurance—decrease variance. Gambling—increase variance.

This is mostly wrong.

Gambling doesn’t require that you “risk it all”. In this way, your entire post looks like it’s arguing against a straw man.

There is a way to gamble in which it is very similar to insurance — extremely defensive and conservative. But that means the gambler isn’t “enjoying” gambling, they are instead just being an accountant, but not earning a salary for it.

They are both games of chance, but you fail to point out why gambling is most frequently outlawed: it is a compulsive behavior that becomes addictive in some people. When 11% of a society can’t maintain a gainful living (maybe they can’t hold a job or they become a habitual liar or a thief to feed their habit), governments tend to step in to dissuade the problematic behavior.

But most people who gamble frequently tend to do it with their lizard brain and most people who purchase insurance do it with their cognitive brain (even if the underlying reasons aren’t based on facts).

Then again, the premise of the question is arguably wrong. The state lottery is one of the biggest forms of gambling and that isn’t illegal (even though the origins were to supplant similar mob-run games).

Insurance for the consumer is lowering your expected value to reduce variance. Gambling for the consumer is lowering your expected value to increase variance. The profit and operating costs for both casinos and insurance companies is the lost EV of their patrons.

You can approach gambling in the same exact way. It's called hedging your bets.

Gambling isn't wrong. Gambling is stupid. Hedging risk is not stupid. That's the difference.

Insurance is stupid if you are wealthy enough to cover the damages on your own.

Insurance for your phone, computer etc for example is certainly stupid for most people.

Generally speaking. I (rarely) buy insurance for things like travel when I have reason to think that I have circumstances that may lead to a higher probability of collecting insurance than the average person automatically buying it has. And I certainly have things like homeowner's insurance where losses could be catastrophic.

But self-insuring for random relatively low-cost events mostly makes little sense for people as it does for companies.

Being wealthy enough to cover it yourself doesn't mean it's stupid to buy the option to avoid the downside if it's priced properly.

Insurance companies are always going to give you unfavorable odds, unless you think for some reason youre more likely than average to have an accident.

I don't understand why car/home insurance isnt nationalized

Car insurance is nationalized in a few Canadian provinces.

https://en.wikipedia.org/wiki/Public_auto_insurance

Reducing variance in a random outcome still has value. For instance, you might have the money to cover an adverse outcome, but if you could guarantee you wouldn't need the money, then you could park it in an illiquid asset (e.g. some type of investment).

Many types of insurance that protect payouts to third parties include provisions that the insurer handles the lawsuit to defend the claim. This can be a convenience even to a wealthy person, especially one who doesn't get sued much.

IMO gambling gets a bad reputation by people who only look at the expected value.

If you place a bet where the cost is low enough that it won’t make a qualitative difference to your life, and the possible (not expected) reward is such that it would make a qualitative difference in your life, then you might have maximized the probability of achieving that qualitative difference, despite lowering your expected value. This could be a reasonable strategy.

I don’t gamble but I see why people do it. The toxic element occurs when the reduction in expected wealth does become enough to produce a qualitative QOL change.

I did this with GME shares in the original run. The profits helped me finish grad school. The money I bet wasn’t enough to cause serious issues on loss but the payoff was enormous.

This is related to utility I suppose.

Could we say that the “expected” utility of certain gambles is high enough to make them have higher utility than not betting?

> then you might have maximized the probability of achieving that qualitative difference

No, you have only maximized the probability if you bet all of your money and all of the money you can borrow, beg or steal.

Utility is a non-linear and hard-to-estimate function of money. I may be almost as well off with $5000 as with $10000, since either case I can afford groceries until the next paycheck and still need to keep my job, but much worse off if I have $0, since I can't afford groceries, and much better off if I have $5,000,000, since I don't need a job, but not much better off from that if I have $10,000,000. If I can bet $5000 for a chance of $5,000,000 it might be worth it, but betting $10000 would leave me penniless and not increase my possible reward that much - what am I going to do, buy two mansions if I win? Buy a bigger one that I have no use for?

That is true, maximized is the wrong word. But you’ve increased the odds in a way that might not be available otherwise. Actually maximizing could have a major cost.

However, being sold something like health insurance as hedging risk is bullshit.

There is no risk in needing to provide healthcare to a population, its a given, though its not always equal cost per person.

However, something like crop insurance allows one to take the up front risk of buying a ton of seed and machines while hedging against the off chance that drought, fire, pest or rain ruins a crop before it can be harvested months later.

> being sold something like health insurance as hedging risk is bullshit.

More precisely, what is now called "health insurance" in countries like the US is mostly not insurance, because it does not involve costly, rare, unpredictable events, which are the kinds of events that are insurable risks. What should happen is that those kinds of things (for example, insurance against injuries in accidents) should be separate from the provision of predictable health care services, which most health care services are.

To be fair, accidents and large health issues are relatively predictable in any population.

What makes health insurance particularly predatory, is the attempt to carve around segments of the population to make money in something that everyone needs.

Almost all accident insurance could be grouped under occupational and transportation related insurance. The remaining accident insurance would be insanely small across almost all segments of any population.

> accidents and large health issues are relatively predictable in any population.

Yes, which makes insurance feasible for such things to the extent that they are rare and unpredictable for particular individuals. (Note that many "large health issues" are not necessarily unpredictable for particular individuals.)

> What makes health insurance particularly predatory, is the attempt to carve around segments of the population to make money in something that everyone needs.

I think the biggest problem is what I said before, that what we call "health insurance" actually includes many things that are not insurance and should not be sold as insurance. If we remove the things that should not be insurance in the first place, I agree that what's left over should be feasible to handle using ordinary insurance practices as is done in other areas.

> Gambling is stupid.

Not if the entertainment value provided is sufficient to compensate for the money lost. Not all benefits are monetary.

There is no risk in which to hedge unless you gamble. If gambling is stupid, then hedging risk must also be stupid by association.

I would say that offering gambling to people, knowing that many are susceptible to the addiction cycle for whatever reasons, is what is the most wrong in this equation I think

But then again you could also argue that those offering the gambling are themselves merely victims of a different addiction cycle involving greed or fear or whatnot

This article is really interesting and explains the common origins of gambling and insurance, I had no idea that Lloyds of London began as essentially a gambling ring (and before that a coffee shop, another fascinating topic in the history of London and Paris especially and the world in general). Also a great line about governments being little more than mutual aid societies.

The comments here are a big let down. Just people opining glibly on the title. I hoped for better.

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