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#16
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[ QUOTE ] A while ago pvn made a post saying that buying insurance increases variance, which seems like lunacy to me. I asked him what he meant, but he either didn't respond or I missed the response. [/ QUOTE ] I did respond. Basically, it was a smart-ass way of looking at things from a different perspective. Insurance doesn't actually prevent a big loss; it merely provides you with a jackpot at the same time as you sustain the loss. You're going to have the loss regardless of whether you have insurance or not (well, for the most part; sometimes people will change their habits based on their insurance status). The loss increases your variance. The insurance payout increases it as well - but in the opposite direction; they cancel out, but you still have two instances of variance (where you'd only have one without insurance). Good variance is still variance. Compare two scenarios, one without insurance, and one with. Without insurance: you have a wrecked, unusable car, and possibly a bunch of liability debts. With insurance: you have a shiny new car, and possibly a bunch of settled liabilities. Jackpot! [/ QUOTE ] Sorry that I missed your response. I didn't mean to imply that you ducked my question. Also, I think your view is fundamentally wrong. The only thing that's important is the net gain or loss due to the event. The fact that the actual event is a big loss plus a big gain doesn't make it more "variant". If the gain is larger than the loss (or vice versa), that's a case of someone having too much or too little insurance, not an increase in variance introduced by the contract. |
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