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What makes gambling wrong but insurance right? (2017)

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Re: What makes gambling wrong but insurance right? (2017)

#201

Post by klyrs »

xp84 wrote: post #27
Almondsetat wrote: post #19

Earlier quoted context omitted.

"Risking it all" was not referring to being a gambling addict. It simply meant that if you put 10k on black and the ball goes on red, you lose all of the 10k

Same as if I buy a 10-year term life insurance policy and don't die during that decade. I lost all of the full premium paid.

No, the cost of a "jackpot" in life insurance is the premium plus literal life or limb. Only looking at the premium is penny wise, pound foolish. If you don't have the insurance and you die, your estate is out a million dollars because you skimped a few thousand.

Re: What makes gambling wrong but insurance right? (2017)

#202

Post by bluecalm »

mungoman2 wrote: post #186
bluecalm wrote: post #168

I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…

Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

>>Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

Imagine you have $10k to your name and flip a coin for $1k. Your expected value in money terms is $9k * 0.5 + $11k * 0.5. Your expected value in utility terms is: u($9k) * 0.5 + u($11k) * 0.5 where u is a function that tells you how much worth you get from money. See wikipedia link for some explanation (although I think the articles are over-complicated and don't convey the point in clear way):

https://en.wikipedia.org/wiki/Utility

https://en.wikipedia.org/wiki/Marginal_utility#Law_of_Dimini...

The key point is that utility is concave (a coin flip for any amount has negative utility) which is obvious when you think about it (better to be a millionaire than flip a coin to be busted or have 2 million net worth) but maybe not something most people think when making everyday decisions.

Re: What makes gambling wrong but insurance right? (2017)

#203

Post by bluecalm »

greg_V wrote: post #195
mungoman2 wrote: post #186

Earlier quoted context omitted.

Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

It's a convoluted way of saying "use value" vs. "exchange value". A million dollars is a million dollars, or it's a house. I don't need a million dollars but I do need a house or I freeze to death. I can't eat a million dollars worth of food but I need to eat food every day or I die. Gambling is seen as immoral because it's about extending your exchange value capabilities, although most people who gamble are poor as…

It doesn't really matter much if you have a million dollars or a million dollar house (+/- liquidity of assets but this is not really important for the discussion).

>>Gambling is seen as immoral because it's about extending your exchange value capabilities

Why would extending your exchange value capabilities would be seen as immoral? It sounds good to me. I think you are missing the point.

Re: What makes gambling wrong but insurance right? (2017)

#204

Post by Lazare »

Fundamentally both "gambling" and "insurance" are about trading a stream of small guaranteed payments for a chance at receiving a large payment. More generally, it's about trading risk. In insurance the risk is transferred to the insurance company; in gambling the risk is trasnferred to the gambler.

They're precisely the same transaction, just packaged in different ways, and with tons of overlap. What differs is the participants.

Individuals don't tend to want or need a lot of risk, so a transaction where risk is transferred from an individual to a large company (like an insurance company) is generally good, and one where risk is transferred from a large company (like a casino) to an individual is generally bad.

Re: What makes gambling wrong but insurance right? (2017)

#205

Post by bluecalm »

Narkov wrote: post #188
bluecalm wrote: post #168

I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…

> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. Clearly you are protecting an unlikely situation so the utility value of peace of mind would need to be quantified. Gambling has utility too...entertainment…

>>Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid.

This is wrong and the reason you are confused about the argument. If insurance is priced fairly all parties benefit utility wise. It's true that the buyer has negative expected value money wise and the seller positive one but as the utility function is concave both parties benefit. The important thing is to be able to see value in insurance. Once you are able to see it you will understand why it's worth a premium.

One natural question is why the insurer can afford to sell the insurance and not lose expected utility. The answer is that the insurer has a bigger bankroll and the utility curve is flatter for them than it is for the buyer. That's why they can offer a lower premium than an individual in similar position to the buyer would be.

Re: What makes gambling wrong but insurance right? (2017)

#206

Post by MaxBarraclough »

throwawaymaths wrote: post #124
hattmall wrote: post #120

Earlier quoted context omitted.

Only thing I insure is umbrellas. They never last more than 2-3 years and a 7 year replacement plan for like 8.99 is a reasonable deal. Anything else I tend to just go with credit card purchase protection and MFR warranty.

Insuring your tires at discount tire/America's best tires is always worth it too.

Why's that? They're selling the insurance plan for a profit, after all. The expected return, from the buyer's point of view, is negative.

If your financial situation is such that you'd be in trouble if you had to replace a tire, then sure, but tires aren't that expensive.

Re: What makes gambling wrong but insurance right? (2017)

#207

Post by raincole »

mungoman2 wrote: post #186
bluecalm wrote: post #168

I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…

Hm I don't follow. Could you please define "expected value in money terms" vs "expected value in utility of money terms"

If you have 10% chance to lose -$91 and 90% chance to get +$10, the expected value in money is -$0.1. It sounds bad.

But the relationship between utility and money isn't linear. If for you, $10 is worth 10u and $91 is worth only 89u, this deal has expected value of +0.1u.

Why and how isn't it linear? It's a hard problem that can't be answered easily. However we know it's true for most big institutions in stock and bond markets. A financial product will need to provide extra expected value in term of money to compensate the risk, otherwise no one buys it.

Re: What makes gambling wrong but insurance right? (2017)

#209

Post by kgwgk »

bluecalm wrote: post #168

I feel the article as well as most of the comments miss the most important difference between the two. Insurance, assuming the fee isn't too high, increases your utility of money while gambling decrease it. If there is an event that happens 1 time in 100 that costs you $100k and you pay $1.05k to insure against that would have a negative expected value in money terms but positive expected value in utility of money te…

> This decreases combined utility of you and your counter-party.

The counterparty tends to have an edge. Roulettes have zeros, bookies get a cut, etc. I guess on a poker table everyone thinks that they have an edge but they can't all be right.

Re: What makes gambling wrong but insurance right? (2017)

#210

Post by JackFr »

bluecalm wrote: post #205
Narkov wrote: post #188

Earlier quoted context omitted.

> With this in mind insurance is a service worth paying for as long as the fee is lower than utility you gain from it. Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. Clearly you are protecting an unlikely situation so the utility value of peace of mind would need to be quantified. Gambling has utility too...entertainment…

>>Insurance is invariably a "for profit" enterprise so the utility or return across all participants has to be lower than the value invested/paid. This is wrong and the reason you are confused about the argument. If insurance is priced fairly all parties benefit utility wise. It's true that the buyer has negative expected value money wise and the seller positive one but as the utility function is concave both parties…

Insurance is not always a for profit enterprise. There are very many “mutuals” who are literally owned by their policy holders.
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