Is insurance always evil/stupid?

Shadowrun · #1 03-12-2007, 04:06 PM

For some reason every time insurance is brought up, people always talk about how stupid/useless it is. However, as my chart shows that is not always the case.
Here it makes sense to pay up to 4,000 (to guarantee at least you get 16,000) if you can either choose point A or point E.

BCPVP · #2 03-12-2007, 04:20 PM

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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...?

DVaut1 · #3 03-12-2007, 04:30 PM

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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.

Borodog · #4 03-12-2007, 04:34 PM

Uh, who exactly is it that thinks "insurance" is evil?

Whenever you are risk averse and/or the risk of ruin is large, insurance makes perfect sense. You are buying down variance for a small price in EV.

mosdef · #5 03-12-2007, 04:36 PM

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Uh, who exactly is it that thinks "insurance" is evil?

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People with linear utility curves?

Shadowrun · #6 03-12-2007, 04:40 PM

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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.

mosdef · #7 03-12-2007, 04:42 PM

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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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This is a pretty silly example, because insurance can't be -EV for the insurance company in aggregate or they will go bankrupt. Overall, the insurance company makes money (and they're really good at it, too).

Shadowrun · #8 03-12-2007, 04:43 PM

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Uh, who exactly is it that thinks "insurance" is evil?

Whenever you are risk averse and/or the risk of ruin is large, insurance makes perfect sense. You are buying down variance for a small price in EV.

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there was a thread a while ago in oot where some one made that comment (basically saying insurance/insurance salesman are evil etc.) im not sure if it was in jest or not.

other than that i thought it would be an interested thread for discussion.

mosdef · #9 03-12-2007, 04:45 PM

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Uh, who exactly is it that thinks "insurance" is evil?

Whenever you are risk averse and/or the risk of ruin is large, insurance makes perfect sense. You are buying down variance for a small price in EV.

[/ QUOTE ]

there was a thread a while ago in oot where some one made that comment (basically saying insurance/insurance salesman are evil etc.) im not sure if it was in jest or not.

other than that i thought it would be an interested thread for discussion.

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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.

Shadowrun · #10 03-12-2007, 04:45 PM

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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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This is a pretty silly example, because insurance can't be -EV for the insurance company in aggregate or they will go bankrupt. Overall, the insurance company makes money (and they're really good at it, too).

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thats a good point, but what if they are subsidized (so instead of paying out full price the government pays some out money).

the point of the example was just to show that most posters think that insurance is always -EV i just wanted to show that it doesnt have to be the case.