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Comment by SeanLuke | Hacker News Reader

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.

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> 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.

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.

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