[Rupert]

I sent this PM to El Diablo a while ago and posted something similar on my blog which received comments that make me think the answer is basically an intuitive bankroll management thing. Regardless, it might be interesting nevertheless to post it here.

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Insurance is obviously a -EV proposition so why do people take it out? Do the same people that do play the lottery?

People tell me they take it out because in the event of an improbable event they want their family/house/car or whatever to be safe or covered. In other words, their utility loss plus their financial loss [in the case of a disaster] is worth a small LR financial loss to cover it. So at what point does the probability of something become so negligible that insurance is not worth it? Should people take out special meteor insurance? What about flood insurance if they live in a place which has never had a flood? Hurricane insurance in Siberia? Say you live on the coast. The P(flood) is obviously higher than other places so you take flood insurance. But why aren't you taking ALL possible insurance against things that can hit you?

If the loss of utility is so great that you must make a losing proposition to cover it, what if the gain in utility can be so great that you make a losing proposition to gain it? Say you spend $100 a month on insurance. This money does not effect your lifestyle. Should you also be spending $100 a month on lottery tickets since the utility you gain is so much greater and perhaps the psychological gain is also equal to that of the loss of your house.

Perhaps i'm missing something fundamental here that I can't put my finger on (maybe it is because I don't have kids or anything of great financial value) but if I ever get insurance [that isn't compulsary] I imagine I will set aside a similar amount to gamble with for the chance of a big score.