Is insurance always evil/stupid?

[mosdef]

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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.

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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!

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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.

[gazarsgo]

The only reason health insurance can negotiate a discount is because of the monopoly they have through leveraging their clientele -- if the doctor doesn't play ball, they don't get coverage under the health insurance company and they don't get referrals from the health insurance's directory of doctors.

This drives up the cost for people who DON'T have health insurance.

It's easy to advocate for insurance when there is a lien on the property in question, but if you own a $7-8k car free and clear, should you pay $300/mo in comprehensive auto insurance? (real life numbers)

[Shadowrun]

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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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i agree with mosdef here the net change is key.

[csuf_gambl0o0r]

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For some reason every time insurance is brought up, people always talk about how stupid/useless it is.

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Anyone in particular...?

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Also, what does the OP have to do with the Politics forum?

Regardless, as far as insurance goes, some people are willing to take -EV propositions to avoid the ruinous consequences of possible catastrophes, and I don't necessarily see that as evil or stupid.

In other words, I understand that when I buy home-owners insurance, it's a -EV play, but I sleep better at night because of it.

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another example sir

Lets say your house has 50,000 worth of stuff in it.
Lets say the probability to get robbed is .1 (and obviously to not get robbed is 9).

So we have an EV of 49,000 (with a std dv of 3000)

so how much insurance can one pay for it to be neutral EV
the answer is 1,000.
since paying 1,000 in insurance give you an expected value of 49,000 was well (with 0 in standard deviation)

so if you can get a price for less than 1,000 dollars, insurance becomes +EV.

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How do you get 49,000 for the original EV?